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Earnings Announcements, Stock Price Adjustment, and the Existence of Option Markets

Authors

  • ROBERT JENNINGS,

  • LAURA STARKS

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    • Department of Finance, Indiana University School of Business and Washington University, respectively. We would like to thank Indiana University and Washington University for financial support and Richard Rendleman and the participants of the Indiana University finance workshop for their comments. In addition, the comments of two anonymous referees were valuable in improving the paper. A previous version of this paper was presented at the Financial Management Association meeting on October 11, 1984. Responsibility for any remaining errors is the authors'.

ABSTRACT

This paper employs a new approach to study the effects of option trading on the behavior of underlying stock prices. Extant research compares distributional properties of the stock price at two points in time divided by an event in the option market that might affect price behavior. As an alternative, we examine the stock price adjustment to the release of quarterly earnings using samples of firms with and without listed options. We find the two samples exhibit different adjustment processes, with the nonoption firms requiring substantially more time to adjust.

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