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Past Managerial Guidance and Returns to Variance Trading Around Earnings Announcements

I investigate the relationship between past managerial guidance and realized variance risk premiums (VRPs) – i.e., the difference between implied and realized variance – in equity options around earnings announcements. I find that implied variances are lower before earnings announcements but VRPs are higher when firms provide guidance. I also find higher option‐implied jump risk when firms issue surprising guidance. Further tests suggest a portion of the higher VRPs are due to changes in perceived higher‐order risks, but traders also underreact to the precision of information in short‐term guidance. These results are attenuated for firms with a better information environment.