Accounting quality, information risk and implied volatility around earnings announcements

Anagnostopoulou, S. C. and Tsekrekos, A. E. (2015) Accounting quality, information risk and implied volatility around earnings announcements. Journal of International Financial Markets, Institutions and Money, 34. pp. 188-207. ISSN 1042-4431 doi: 10.1016/j.intfin.2014.10.006

Abstract/Summary

We examine the impact of accounting quality, used as a proxy for information risk, on the behavior of equity implied volatility around quarterly earnings announcements. Using US data during 1996–2010, we observe that lower (higher) accounting quality significantly relates to higher (lower) levels of implied volatility (IV) around announcements. Worse accounting quality is further associated with a significant increase in IV before announcements, and is found to relate to a larger resolution in IV after the announcement has taken place. We interpret our findings as indicative of information risk having a significant impact on implied volatility behavior around earnings announcements.