What Does Reporting Reputation Buy in the Options Market? The Effect of Reporting Streaks on Ex Ante Uncertainty

• In Event: CEO Reputation and Pay

Abstract

This paper predicts and finds that investor ex ante uncertainty is decreasing in a firm’s reporting reputation. Our two primary proxies for investor uncertainty are model-free implied volatilities and the variance risk premium, both with maturities that surround a key disclosure event: an impending quarterly earnings announcement. Our experimental construct of reporting reputation reflects manager/firm ability to achieve expected earnings targets, empirically measured as the number of consecutive quarters the firm meets or beats the consensus analyst forecast (i.e., “reporting streak”). We document that both measures of uncertainty are decreasing in the length of the reporting streak. We interpret this as consistent with investor learning, under which investors appear to condition the expected price effects (and related compensation to provide price protection) surrounding a major future signal release upon the firm’s historical tendency to deliver anticipated performance.

Authors

• Edward Riedl, Boston University

• Thaddeus Andrew Neururer, Boston University

• George Papadakis, US Securities and Exchange Commission