This study examines the effect of option volume relative to stock volume (O/S) on market response to earnings surprises. The market reaction per unit of earnings surprise is lower for firms that have high O/S prior to earnings announcement than for firms with low O/S prior to earnings announcement. The difference is exacerbated for higher levels of pre-announcement returns. Results suggest informed trading by option traders stimulates preemption of the information content of earnings releases and makes earnings surprises less of a surprise. Overall, results are consistent with the view that options improve informational efficiency. Results are robust to several controls.
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