Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information

The arrival of public information in the U.S. Treasury market sets off a two-stage adjustment process for prices, trading volume, and bid-ask spreads. In a brief first stage, the release of a major macroeconomic announcement induces a sharp and nearly instantaneous price change with a reduction in trading volume, demonstrating that price reactions to public information do not require trading. The spread widens dramatically at announcement, evidently driven by inventory control concerns. In a prolonged second stage, trading volume surges, price volatility persists, and spreads remain moderately wide as investors trade to reconcile residual differences in their private views.     

THE CROSS-SECTIONAL EFFECTS OF OPTION LISTING ON FIRM STOCK RETURN VARIANCES

We develop a set of hypotheses to explain cross-sectional differences in variance changes associated with option listing. Transactions variance is decomposed into three components: the bid-ask spread, return autocorrelations, and intrinsic variance. Each is investigated separately. We find support for hypotheses that link: (1) changes in dealer transactions costs to changes in the bid-ask spread following option listing; (2) changes in the quantity and quality of information and the value of new information to movements of the return autocorrelation structure toward zero; and (3) changes in trading volume and the clientele that trades the underlying security to changes in intrinsic variance following option listing.     

The Information Content of Dividend Initiations and Firm Size: An Analysis Using Bid-Ask Spreads

The bid-ask spread of stock prices is examined for a sample of dividend initiating firms. The average percentage and dollar bid-ask spreads increase significantly on the day preceding the Wall Street Journal Index announcement date, possibly reflecting, on average, the market maker's anticipatory uncertainty. The day -1 increase in spread is inversely associated with firm size, an information environment proxy, after considering the simultaneous effects of dividend yield, returns variance, dollar trading volume and share price. The average percentage spread declines significantly on day 0 from its day -1 level and remains lower, on average, over a 365 day post-announcement period than 90 day pre-announcement levels. Similar results are obtained for dollar spread averages. The post-announcement percentage spread decline suggests a resolution of uncertainty, and is positively associated with the dividend yield. Dividend initiation announcements appear to reduce informational asymmetry.     

INTRADAY CHANGES IN TARGET FIRMS' SHARE PRICE AND BID-ASK QUOTES AROUND TAKEOVER ANNOUNCEMENTS

This paper documents changes in share prices, bid-ask spreads, and quote sizes for target firms during the day a takeover proposal is announced. The mean 21.2 percent announcement-day return consists primarily of a 19.5 percent return at the announcement. There is little evidence that spreads increase before the announcement, except when trading is suspended because of an order imbalance. Quote sizes show some sign of decreasing just before the announcement. The quoted bid-ask spread and size increase immediately after the announcement, but spreads quickly return to normal.     

Liquidity skewness in the London Stock Exchange

We study liquidity on the London Stock Exchange. We find that the average bid-ask spread declines, but that the skewness of the spread increases. These results are robust to firm size, trading volume and price level. Our findings hold when the bid-ask spread is estimated utilising high frequency data. We find that the bid-ask spread prior to earnings announcements dates is significantly higher than that of post earnings announcements, suggesting that asymmetric information has driven the increase in liquidity skewness. We also find that the effect of earnings announcements is more pronounced in the 2007 global financial crisis, consistent with the notion that extreme market downturns amplify asymmetric information. Our overall evidence also implies that increased competition and transparent trading environments limit market makers' abilities to cross-subsidize bid-ask spreads between periods of high and low levels of asymmetric information.     

BID-ASK SPREAD COMPONENTS AROUND ANTICIPATED ANNOUNCEMENTS

In this paper I re-examine spreads around dividend and earnings announcements and provide new evidence on patterns by examining the components of the bid-ask spread. Transaction data are examined through a recently developed spread decomposition model that decomposes the bid-ask spread into a fixed (execution) component and an adverse selection component. In addition, this model does not rely on a constant spread as previous spread decomposition models require. The results show that around earnings announcements, the bid-ask spreads and spread components have significant changes indicating that the anticipated announcement is informative. However, the actual public announcement of a dividend does not alter the bid-ask spread and spread components of actively traded securities.     

Trading Behavior and the Unbiasedness of the Market Reaction to Dividend Announcements

This article examines the price formation process during dividend announcement day, using daily closing prices and transactions data. We find that the unconditional positive excess returns, first documented by Kalay and Loewenstein (1985) , are higher for small-firm and low-priced stocks. Price volatility and trading volume also increase during this period. Examination of trade prices relative to the bid-ask spread and volume of trades at bid and asked prices shows that the excess returns cannot be attributed to measurement errors or to spillover effects of tax-related ex-day trading. Rather, the price behavior is related to the absorption of dividend information.     

Investor Information Demand: Evidence from Google Searches Around Earnings Announcements

The objective of this study is to investigate factors that influence investor information demand around earnings announcements and to provide insights into how variation in information demand impacts the capital market response to earnings. The Internet is one channel through which public information is disseminated to investors and we propose that one way that investors express their demand for public information is via Google searches. We find that abnormal Google search increases about two weeks prior to the earnings announcement, spikes markedly at the announcement, and continues at high levels for a period after the announcement. This finding suggests that information diffusion is not instantaneous with the release of the earnings information, but rather is spread over a period surrounding the announcement. We also find that information demand is positively associated with media attention and news, and is negatively associated with investor distraction. When investors search for more information in the days just prior to the announcement, preannouncement price and volume changes reflect more of the upcoming earnings news and there is less of a price and volume response when the news is announced. This result suggests that, when investors demand more information about a firm, the information content of the earnings announcement is partially preempted.     

Effectiveness and Market Reaction to the Stock Exchange's Inquiry in Australia

Abstract:  This paper examines a unique stock market monitoring program used by the Australian Stock Exchange (ASX) . When the ASX observes unusual share price or trading volume changes of a listed company, it sends a letter demanding an explanation. Companies need to respond publicly to several stylized questions. Such public communications between the stock exchange and listed companies contain information. This paper documents how companies respond to the ASX inquiry and how the market reacts to the replies. It is found that some companies do release new information to the market when asked. After the firm's reply is posted, the average trading volume and the bid-ask spread are reduced, and in most cases, the share price is also stabilized with the following two exceptions: (1) The price will continue to rally on average if the company releases only partial information when questioned after a significant price jump; (2) The downward price trend will be reversed if the company states that no new information could explain the decline. Furthermore, there are statistically significant, positive abnormal returns for the first five trading days, which are not conditional upon the replies firms give to the ASX inquiries.     

CHANGES IN TRADING ACTIVITY FOLLOWING STOCK SPLITS AND THEIR EFFECT ON VOLATILITY AND THE ADVERSE-INFORMATION COMPONENT OF THE BID-ASK SPREAD

We examine changes in trading activity around stock splits and their effect on volatility and the adverse-information component of the bid-ask spread. Even after controlling for microstructure biases, we find a significant increase in volatility after the split. Changes in total volatility and in its permanent component are positively related to changes in the number of trades. This suggests that both informed and noise traders contribute to changes in trading activity. Further, while the adverse-information component of the spread increases unconditionally after the split, the change is negatively related to the change in trading activity. The results suggest that a crucial determinant of liquidity changes after a stock split is the success of the split in attracting new trades in the security.     

AUDITOR CHANGE ANNOUNCEMENTS AND DISPERSION OF INVESTOR EXPECTATIONS

The effect of auditor change announcements on the dispersion of investor expectations is investigated by using two approaches. First, the consensus effect (Holthausen and Verrecchia, 1990) is measured by examining unanticipated trading volume change. We show that auditor change announcements provide information to the market, and that the consensus effect dominates the informedness effect. Second, the reduction in information asymmetry (Glosten and Milgrom, 1985) due to auditor change announcements is demonstrated by a reduction in proportional bid-ask spread, which is not driven by increased trading volume. Thus, auditor change announcements reduce dispersion of investor beliefs in that they are both information asymmetry-reducing and consensus-increasing. Finally, we show that the type of auditor change (Big-Eight to Non-Big-Eight, Non-Big-Eight to Big-Eight, or Within-Class) has no impact on the dispersion-reducing effect of auditor change announcements.     

Insider Trading and the Bid-Ask Spread

This study examines the intertemporal and cross-sectional association between the bid-ask spread and insider trading. Empirical results from the cross-sectional regression analysis reveal that market makers establish larger spreads for stocks with a greater extent of insider trading. The time-series regression analysis, however, finds no evidence of spread changes on insider trading days. These results suggest that although market makers may not be able to detect insider trading when it occurs, they protect themselves by maintaining larger spreads for stocks with a greater tendency of insider trading. The results also reveal that market makers establish larger spreads when there are unusually large transactions. In addition, this study finds that spreads are positively associated with risk and negatively with trading volume, the number of exchange listings, share price, and firm size.     

Liquidity,liquidity risk,and information flow: Lessons from an emerging market

This paper examines the role of public and private information flows in intraday liquidity and intraday liquidity risk in the Tunisian stock market. Our empirical results are based on ARMA and GARCH-type models and show that, for major Tunisian stocks, gradually elapsed public information together with gradually elapsed private information in the market is the dominant factor in liquidity improvements in the Tunisian stock market. Liquidity improvements are generated by a decrease in the bid-ask spread accompanied by an increase in the depth at best limit. Our results clearly indicate that the arrival of public information in a sequential manner is the dominant factor generating increases in liquidity risk related to the bid-ask spread, while the advent of private information in a contemporaneous manner is the dominant factor generating increases in liquidity risk related to the depth at best limit. Additionally, our results show that liquidity risk persistence disappears when trading volume and order imbalance are included as explanatory variables in the conditional variance equation.     

Market Sidedness: Insights into Motives for Trade Initiation

We infer motives for trade initiation from market sidedness. We define trading as more two-sided (one-sided) if the correlation between the number of buyer- and seller-initiated trades increases (decreases), and assess changes in sidedness (relative to a control sample) around events that identify trade initiators. Consistent with asymmetric information, trading is more one-sided before merger news. Consistent with belief heterogeneity, trading is more two-sided before earnings and macro announcements with greater dispersion in analyst forecasts, and after news with larger announcement surprises. We examine the codeterminacy of sidedness, bid-ask spread, volatility, number of trades, and order imbalance.     

交易持续期、交易信息与投资者行为——基于PCD模型的研究

使用 PCD 模型,通过引入买卖价差、交易量、交易规模、委托指令流等交易信息变量探讨交易信息对投资者行为的影响。实证研究表明,买卖价差与期望交易持续期显著正相关,不支持 Easley 和 O’Hara (1992)的观点。同时大规模的交易能够显著地延长交易持续期,而中等规模的交易能够减小交易持续期,证实了知情交易者的隐藏交易假说。指令流信息中的买卖申报数量也对交易持续期有显著的影响,上期买卖申报数量与本期交易持续期正相关。     

The effect of economic policy uncertainty on investor information asymmetry and management disclosures

Investor uncertainty about firm value drives investors’ information collection and trading activities, as well as managers’ disclosure choices. This study examines an important source of uncertainty that likely cannot be influenced by most managers and investors: uncertainty about government economic policy. We find that this uncertainty is associated with increased bid-ask spreads and decreased stock price reactions to earnings surprises. Managers respond to this uncertainty by increasing their voluntary disclosures, but these disclosures only partly mitigate the bid-ask spread increase. We conclude that government economic policy uncertainty is an important component of firms’ information environments and managers’ voluntary disclosure decisions.     

Public re-release of going-concern opinions and market reaction

This paper examines the market reaction to the public announcement of going-concern (GC) opinions through the news media. In the early 2000s, NASDAQ and AMEX required firms listed on their exchanges to publicly announce previously disclosed information, such as the issuance of a GC opinion, through a press release or the news media. We examine the stock market reaction to the re-release of GC opinions. We find significant abnormal stock return volatility and trading volume at the re-release of this information. Further, based on an analysis of intraday transactions, we find higher abnormal trading activity in small trades around the re-release of the GC opinion, but largely no changes in large trades during the same period. In this respect, the investors that initiate the small trades act as if they are surprised by the information contained in the press release of GC opinions. Such an action, in turn, can be viewed as evidence of a delayed response to the information in GC opinions by a section of investors.     

Does information asymmetry predict audit fees?

This study investigates whether and how information asymmetry in the stock market affects the quantum of audit fees paid by auditees. It is based on a sample of 218 US publicly traded companies and adopts two well-established proxies for information asymmetry, namely bid-ask spread (BAS) and probability of informed trading (PIN). Empirical results provide evidence that, after controlling for all main audit fees determinants, information asymmetry is positively related to the quantum of audit fees paid. Overall, evidence supports the contention that less transparent companies convey higher audit risk, and therefore auditors require higher compensation.     

ON THE MEASUREMENT OF AUDITING STANDARDS

This study analyzes whether it is appropriate to use the percentage of qualified opinions issued by an auditor as a measure of his auditing standards, as is often done. It points out that incentives exist for auditors to specialize by auditing standards, and for clients to self-select on this dimension. As a result, even if auditing standards affect the propensity to issue qualified opinions, the observed percentages of qualified opinions will not necessarily reflect differences in auditing standards. This proposition is supported empirically with US data. A sample of auditors was split between a "higher standard" and a "lower standard" category based on the percentage of qualified opinions issued. After controlling for client firm size, leverage, systematic risk and "unexpected" earnings, auditing standard category is found to have no significant relation with firm-specific stock returns.     

INTRADAY VARIATIONS IN TRADING ACTIVITY,PRICE VARIABILITY,AND THE BID-ASK SPREAD

In this paper intraday variations in trading activity and the bid-ask spread are examined. Intraday variations in volume and price variability demonstrate a U-shaped pattern as in previous studies. However, I find a U-shaped pattern for a measure of the spread component that is related to the degree of information asymmetry between the specialist and informed traders and an inverted U-shaped pattern for the other spread component related to inventory and order costs. Two alternative explanations are given.