Informational Content of Warrant Trading Prior to Interim Monthly-Revenue Report: Evidence From the Taiwan Warrant Market

Taiwan-listed companies are required to report unaudited net operating revenues monthly. This study examines the information content of trading in the short-sale-prohibited domestic warrant market before the interim accounting disclosures by adopting an implied volatility skew (IV skew) as a proxy for informed trading. We find a significantly negative relationship between the pre-announcement abnormal IV skew of warrants and cumulative abnormal stock return around monthly-revenue disclosures. The results of the placebo test further suggest that the return predictability of the IV skew is not prevalent in normal periods, but only the pre-announcement IV skew possesses predictive power toward future stock returns. Furthermore, the predictability of warrants' IV skew on monthly-revenue announcement return is stronger when the underlying stocks are priced high and weaker when some information about unpublished revenues has been reflected by pre-announcement stock returns. These findings suggest that informed trading is the driving force behind warrant market activities before monthly-revenue reporting.