Publication: Options trades, short sales and real earnings management
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Date
2019
Authors
Ph.D. Mellado-Cid, Cristhian
Jory, Surendranath R.
Ngo, Thanh N.
Journal Title
Journal ISSN
Volume Title
Publisher
Accounting and Business Research
Abstract
We study the link between measures of stock options’ volatility and firms’ real earnings management (RM). We hypothesise that RM causes uncertainty in the value of a firm’s common stock and, as a result, increases the volatility spread and skew of the firm’s options. Spread and skew proxy for investors’ uncertainty in the value of the options underlying a stock. Consistent with our hypothesis, we find an association between a firm’s use of RM, and the volatility spread and skew in the firm’s options, more precisely in its put options. We also study the link between short selling and the extent of RM but do not find a consistent relationship between the two.
Description
Keywords
Stock options, Short selling, Real earnings management, Earnings quality