An Option-Based Approach to Measuring Disclosure Asymmetry

In this paper, I develop a measure of the difference in the amount of information that investors expect a forthcoming disclosure to contain should it reveal good news versus bad news (the disclosure’s “asymmetry”). To do so, I first show that this asymmetry is linked to the skewness of returns that the disclosure creates. I then show that this skewness can be measured using a weighted change in option-implied return skewness leading up to the disclosure’s release. The measure’s ability to capture investors’ prior beliefs regarding asymmetry is advantageous when studying ex-ante decisions including contracting and information acquisition choices. I implement it on a sample of large firms’ quarterly earnings announcements, finding evidence that investors anticipate cross-sectional, but not time-series variation in earnings’ asymmetry.