Princeton University Library Catalog

Market Efficiency and the Information Content of Firm Growth Ratios and Option Pricing Information: Empirical Evidence from Stock Trades Centered on Quarterly Earnings Announcements

Santoro, Daniel [Browse]
Senior thesis
Lord, Graham [Browse]
Princeton University. Department of Economics [Browse]
Class year:
86 pages
Summary note:
This thesis uses publically-available accounting and option pricing information to inform trades centered on quarterly earnings announcements. The various metrics calculated consist of the following: quarter-trailing market-to-book ratios, price-to-earnings ratios, shape of the implied volatility skew at two different dates prior to earnings, and the change in implied volatility skewness in the days preceding earnings. These indicators are investigated because they are believed to express informational content about ex post price reactions. Trades are executed on the day prior to announcement and closed out at three holding periods that correspond to short-term, moderate-term and long-term windows. I test the assumption that past and public information cannot lead to trades that outperform the market adjusted for cross sectional market risk factors. Additionally, this thesis executes a trade that uses inside information about the forthcoming reported earnings per share compared to the median of analysts’ estimates. This final trade enables my study to evaluate the assumption that all relevant information cannot lead to trades that outperform the market. Announcements of quarterly earnings inject useful information into markets that help the price determination process. Since they are obligatory for publically-traded companies and occur four times per year with wellpublicized dates, they are excellent events to analyze.