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Options trades, short sales and real earnings management

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  • Christian Mellado-Cid
  • Surendranath R. Jory
  • Thanh N. Ngo

Abstract

We study the link between measures of stock options’ volatility and firms’ real earnings management (RM). We hypothesise that RM causes uncertainty in the value of a firm’s common stock and, as a result, increases the volatility spread and skew of the firm’s options. Spread and skew proxy for investors’ uncertainty in the value of the options underlying a stock. Consistent with our hypothesis, we find an association between a firm’s use of RM, and the volatility spread and skew in the firm’s options, more precisely in its put options. We also study the link between short selling and the extent of RM but do not find a consistent relationship between the two.

Suggested Citation

  • Christian Mellado-Cid & Surendranath R. Jory & Thanh N. Ngo, 2019. "Options trades, short sales and real earnings management," Accounting and Business Research, Taylor & Francis Journals, vol. 49(4), pages 400-427, June.
    • Handle: RePEc:taf:acctbr:v:49:y:2019:i:4:p:400-427
    DOI: 10.1080/00014788.2019.1573655
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    Cited by:

    1. Fernando Comiran & Subprasiri Siriviriyakul, 2023. "Detecting overproduction: Evidence from inventory write‐down," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 63(3), pages 3351-3386, September.
    2. Ahsan Habib & Dinithi Ranasinghe & Julia Yonghua Wu & Pallab Kumar Biswas & Fawad Ahmad, 2022. "Real earnings management: A review of the international literature," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(4), pages 4279-4344, December.
    3. Xin Yao Li & Pei-Wen Chen, 2020. "Meeting Dividend Thresholds Through Earnings Management of Listed Companies in South Africa," Advances in Management and Applied Economics, SCIENPRESS Ltd, vol. 10(6), pages 1-5.

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