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Abstract
This article utilizes option markets to determine the information content of dividend-initiation announcements. Pre-event informed options trading, measured by abnormal implied volatility spread and skew, predicts the cumulative abnormal returns around dividend-initiation announcements. Options trading is more informative on dividend-initiation announcement returns when the options market is more liquid, the underlying stock market is less informed, and the dividend initiations are of a greater surprise to the market. The results are robust to a randomization test and support the conclusion that pre-event options trading contains information about the market reaction to dividend-initiation announcements.
TOPICS: Derivatives, options, legal/regulatory/public policy, information providers/credit ratings
Key Findings
• The information content of options trading is stronger when the options market is more liquid relative to the underlying stock market.
• The information content of options trading is higher when the dividend-initiating firms have relatively lower pre-initiation cash flows.
• The predictive power of informed options trading is weaker when the underlying stock market is subject to more-informed trading.
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Don’t have access? Click here to request a demo
Alternatively, Call a member of the team to discuss membership options
US and Overseas: +1 646-931-9045
UK: 0207 139 1600