Voluntary Disclosure and the Variance Risk Premium around Earnings Announcements

• In Event: Earnings, Analyst and Disclosures

Abstract

Recent studies show managerial guidance lowers uncertainty levels proxied by implied variances. However, implied variances are biased upwards. This variance risk premium (VRP) compensates traders who sell options short. In this paper, I investigate if managerial guidance affects the VRP in equity options. Using model-free implied variances, I find that while guidance lowers uncertainty, the VRP is actually higher when firms have issued recent guidance. After decomposing the implied variance term structure, I find a significant portion of the effect of guidance on the VRP is attributable to options prices containing a high earnings-date variance premium when firms have issued guidance. Tests reveal this pattern is due entirely to quarterly guidance. Finally, I find evidence that the VRP is more strongly associated with quarterly guidance given close to earnings announcements, negative guidance, and with forecasts provided by firms who provide sporadic guidance to the market.

Author

• Thaddeus Andrew Neururer, Boston University