Measuring the Usefulness of Earnings Announcement for Uninformed Traders-Evidence from Implied Volatility in Option Market

In this research study, we develop a new measure based on the option market to address the information role of earnings announcement on uninformed traders. Enlightened by previous theoretical work by Kim and Verrecchia (1991, 1994) and empirical findings in Patell and Wolfson (1979, 1981), our measure might capture two advantages that informed traders have overall naïve investors. We apply three sets of validity tests and the evidence shows that firms with high disclosure score made by us experience improved market liquidity, less informed trading in stock and option market, less profitability earned by insiders, and more strongly response by analysts. These results indicate our measure does capture the disclosure quality from perspective of uninformed traders. Overall, we construct a financial information measure that could by widely applied and shows that the ability to reduce uncertainty through financial reports plays a significant role in market trading