The Relative Option to Stock Volume (OS) and Market Response to Earnings Surprises

This study examines the effect of option volume relative to stock volume (O/S) on market response to earnings surprises. The market reaction per unit of earnings surprise is lower for firms that have high O/S prior to earnings announcement than for firms with low O/S prior to earnings announcement. The difference is exacerbated for higher levels of preannouncement returns. Results suggest informed trading by option traders stimulates preemption of the information content of earnings releases and makes earnings surprises less of a surprise. Overall, results are consistent with the view that options improve informational efficiency. Results are robust to several controls