Daily Closing Inside Spreads and Trading Volumes Around Earnings Announcements

This paper examines the determinants of inside spreads and their behaviour around corporate earning announcement dates, for a sample of UK firms over the period 1986–94. The paper finds that closing daily inside spreads are affected by order processing costs (proxied by trading volumes), inventory control costs (trading volumes and return variability) and asymmetric information (unusually high trading volumes). Inside spreads start to narrow 15 days before an earnings announcement, and narrow further by the end of the announcement day. We also identify a puzzling phenomenon. There is only a 'sluggish' recovery of spreads after the announcement: inside spreads continue to remain at relatively narrow levels, and take up to 90 days to recover to their pre–announcement width.     

Relation Between Predisclosure Information Asymmetry and Trading Volume Reaction Around Quarterly Earnings Announcements

This study investigates the effects of differences in predisclosure information asymmetry on trading volume reaction during quarterly earnings announcements. The analyses show that trading volume reaction to quarterly earnings announcements is positively related to the level of predisclosure information asymmetry and to the magnitude of the price reaction to the announcements. These results are consistent with Kim and Verrecchia's (1991a) theoretical trading volume proposition, and with Atiase and Bamber's (1994) tests of the proposition based on annual earnings announcements. This study also provides evidence on the relation of predisclosure information asymmetry and trading volume before and after quarterly earnings announcements.     

Relationship Between Analyst Forecast Properties and Equity Bid‐Ask Spreads and Depths Around Quarterly Earnings Announcements

Abstract:   We study the relationships between three variables which proxy for the ex‐ante level of information asymmetry – forecast dispersion, forecast revision volatility, and the level of analyst coverage, and equity bid‐ask spread and depth changes around quarterly earnings releases. Kim and Verrecchia (1994) suggest that earnings releases increase the level of information asymmetry and lower the level of liquidity in the security market. Using both an OLS regression framework and a simultaneous equations model, we examine whether equity bid‐ask spreads increase and depths decrease as the level of information asymmetry increases. Our results indicate that spreads are higher (relative to a non‐event period) around earnings announcements when information asymmetry is more pronounced; however, depths are lower only on the day following the announcement when there is greater information asymmetry. Relative spreads have a significant positive relation with both forecast dispersion and revision volatility and a significant negative relation with analyst coverage. Relative depths have a significant negative relation with forecast dispersion and a significant positive relation with analyst coverage. Our findings indicate that the equity specialist adjusts both spreads and depths when confronting informed traders around earnings releases and that these adjustments are more pronounced when the level of information asymmetry is greater.     

The Impact of Earnings Guidance Cessation on Information Asymmetry

This paper studies the impact of quarterly earnings guidance cessation on information asymmetry using a large sample of firms during the years 2002–11. After earnings guidance cessation, information asymmetry may increase because less information is provided to the market. Alternatively, information asymmetry may decrease if managers have less pressure to manage reported earnings to meet guidance numbers. Our study shows guidance cessation significantly reduces information asymmetry compared to matched non‐guiders and guidance maintainers. We also find that firms engage in less earnings management after guidance cessation, especially for firms that had provided guidance on a persistent basis.     

Information Content and Timing of Earnings Announcements

Abstract:   The China Securities Regulatory Commission requires all listed firms to make earnings announcements by the end of April each year. This requirement creates a unique opportunity for us to evaluate the timing of earnings announcements in a four‐month cluster. Firms, which are willing to make early announcements, tend to surprise the market, as indicated by the higher volume and price reactions. Later announcements are more predictable, as indicated by the lower volume and price reactions. These results indicate that an information asymmetry exists between early and late earnings announcements in Mainland China.     

Firm Size and the Information Content of Annual Earnings Announcements: Australian Evidence

Abstract:   We investigate the effect of firm size on the market's short‐window response to annual earnings announcements for a large sample of Australian listed companies. Our research design involves regressions of unexpected earnings against unexpected returns. Non‐linearity in the returns‐earnings relationship is incorporated and other factors known to affect the response to earnings announcements are controlled for. Contrary to prior US research, our results show that firm size has either no effect on the response to earnings announcements (3 day window) or the response is significantly stronger for larger firms (twenty‐one day window). The information content of earnings announcements is present across firm size categories but the nature of the response differs with firm size and context.     

Financial Analysts' Earnings Forecast Dispersion and Intraday Stock Price Variability Around Quarterly Earnings Announcements

This study investigates the relationship between the dispersion of analysts' earnings forecasts and stock price variability around quarterly earnings announcements. Consistent with theoretical predictions, the empirical analysis shows that stock price variability at the time of earnings announcements is positively related to the degree of analysts' predisclosure earnings forecast dispersion. Additionally, firms with high levels of forecast dispersion exhibit significant increases in price variability for longer periods prior to and following earnings announcements than do firms with low levels of forecast dispersion. These results suggest that there is information about the earnings announcement that becomes available to at least a subset of investors prior to the earnings release and that market participants take different amounts of time to process the information conveyed by the earnings announcement.     

Information Asymmetry and Earnings Management: Some Evidence

This paper conducts an empirical investigation of the relationship between information asymmetry and earnings management predicted by Dye (1988) and Trueman and Titman (1988). When information asymmetry is high, stakeholders do not have sufficient resources, incentives, or access to relevant information to monitor manager's actions, which gives rise to the practice of earnings management (Schipper, 1989; Warfield et al., 1995). Empirical results suggest a systematic relationship between the magnitude of information asymmetry and the level of earnings management in two different settings.     

Who Trades Around Earnings Announcements? Evidence from TORQ Data

Abstract:  Using TORQ database we investigate the intra-day trading volume reactions to earnings announcements of five trader groups, individuals, institutions, exchange members, program traders, and specialists. The results of this study indicate that institutions are most active in the immediate aftermath of an announcement. Individual investors are slow at the beginning but accumulate heavy volume afterwards and exceed institutional trading volume. We find support for Harris and Raviv (1993) and Admati and Pfleiderer (1988) , who respectively argue that divergence of opinion about a public information and portfolio rebalancing cause surges in pre- and post-announcement trading volume. Further we find evidence of swift and aggressive trading by informed and sophisticated institutions in the immediate aftermath of the announcement, and delayed, aggressive trading volume 'overreaction' by 'slow' and 'overconfident' individual investors as documented by Barber and Odean (2000 and 2002) and Daniel et al. (1998) . NYSE specialists provide the bulk of the liquidity needs around earnings announcements.     

Informed Trading Around Earnings Announcements: Another Look

This study is an empirical test of the Easley, O'Hara, and Srinivas (1998) multimarket sequential trade model of stock and option markets. We employ two approaches to determine the information content of signed stock and option trades executed around quarterly earnings announcements. The first approach expands the vector autoregression (VAR) technique of Hasbrouck (1991a) to include signed option trade volumes and inter‐trade durations. Estimates from the VAR models provide insight into whether both equity and option trades are viewed as informative by the equity specialist. The second approach focuses on the information content of the earnings releases to determine whether signed equity and option trades executed prior to the announcements are informed. Results indicate that although informed traders prefer to transact in both markets around earnings announcements, option market transactions contain no incremental information.     

Quarterly Earnings Announcements and Market Risk Adjustments

We examine (1) whether there is a shift in beta for individual securities around quarterly earnings announcements, and (2) whether these beta changes relate to certain characteristics of the firms. We find a statistically significant upward (downward) beta shift during the two-day earnings announcement period for 25 per cent (9 per cent) of a sample of 195 US firms. We also find that the beta shift at the time of the earnings announcement is significantly higher for small firms (i.e., more precise announcements).     

Market Reaction to Multiple Contemporaneous Earnings Signals: Earnings Announcements and Future Earnings Guidance

We examine market reactions to contemporaneous announcements of current earnings and future earnings guidance for evidence on how investors trade off relevance and reliability. Current earnings are more reliable than future earnings guidance, but future earnings guidance may be more relevant for predicting future performance. We find that current earnings are more strongly associated with announcement-period returns than concurrently disclosed future earnings guidance, consistent with investors’ relative preference for reliability. We find similar return reactions to stand-alone earnings and to earnings released with guidance. In contrast, return reactions are lower for guidance announced simultaneously with current earnings than for stand-alone guidance.     

Earnings Announcements, Asymmetric Information, Trades and Quotes

This paper empirically analyses trades and quotes around the times of 37 earnings announcements in the Paris Bourse. We find that trading volume is larger on announcement days, spreads are wider after announcements, and the permanent positive (resp. negative) price impact of purchases (sales) is greater around announcements. While the findings pertaining to the spread and the permanent impact of trades are consistent with the view that earnings announcements correspond to an increase in information asymmetries, the result that trading volume is larger suggests that other effects are at work.     

Earnings Announcements,Differences of Opinion and Management Guidance

Berkman, Dimitrov, Jain, Koch, and Tice (2009) document a negative relationship between differences of opinion and earnings announcement returns, and this relationship is more pronounced when short‐sale constraints are likely to be high. These findings are interpreted as support for the theory in Miller (1977) that binding short sale constraints cause pessimists to be underrepresented in price formation. We conjecture that accounting information (i.e., earnings news) is likely to play a role in this returns pattern. After controlling for the level of earnings news, we find that the relationship between differences of opinion and stock returns is either eliminated or opposite from what is predicted by Miller's theory. Further, we present evidence that suggests the confounding effect of earnings news can be explained by (pessimistic) management earnings guidance. Our findings offer an alternative explanation for why low differences of opinion stocks earn greater abnormal returns around earnings announcements.     

Individuals’ Trading Prior to Earnings Announcements

This paper investigates the relationship between individuals’ net trading and stock price movements before and after annual earnings announcements for the Taiwan Stock Exchange. We conduct an event study on the effects of pre‐event individual trade imbalances on pre‐ and post‐announcement abnormal returns. With a unique and comprehensive dataset, we accurately classify executed orders by aggressiveness of order price. The evidence indicates that while individuals, as a group, are not informed about impending earnings announcements, individuals who place aggressive orders are informed as their net trading coincides with contemporaneous and future stock returns. Aggressive individuals lose their edge during the financial crisis. More importantly, the advantage (disadvantage) for individuals who adopt aggressive (passive) orders weakens when foreign institutions own concentrated equity in firms. We also find that net individual trading contains information about abnormal returns that either past returns or volume does not subsume. Controlling for past returns, trading volume and volatility, or using an alternative measure of net individual trading does not change our conclusions.     

Earnings Announcements: Good News for Institutional Investors and Short Sellers

In this paper, we consider the trading behavior of institutional investors and short sellers around earnings announcements. The results suggest that institutional investors, and to a lesser extent short sellers, successfully anticipate earnings news. In the period immediately after the earnings announcement, both types of traders are active in the market and trade in response to the earnings announcement. In particular, short sellers are quick to increase their short positions when a company releases bad news. Institutional traders also trade in response to the news; however, they take longer to react.     

Changes in the Information Efficiency of Stock Prices: Additional Evidence

Previous research shows, using data from three quarters after the implementation of regulation fair disclosure (Reg FD), that there is an improvement in the informational efficiency of stock prices after Reg FD. We compare the informational efficiency of stock prices in four pre-Reg FD quarters (1999–2000) and 12 post-Reg FD quarters (2002–2005). The improvement in the informational efficiency of stock prices previously reported in the immediate aftermath of Reg FD persists in later periods.     

Earnings Forecasts and the Information Contained in Spinoff Announcements

This study examines spinoff announcements in conjunction with financial analysts’ forecasts of earnings. The analysis shows that spinoff announcement abnormal returns are significantly related to the firm's information environment as proxieci by financial analysts’ earnings prediction errors. The findings also indicate that analysts significantly increase their short-term earnings forecasts in response to spinoffs, but do not significantly revise their long-term earnings forecasts. However, the earnings revisions are not significantly different across prediction error groups, which confirms that spinoff-related abnormal returns cannot be attributed solely to expected performance gains.     

Book Value,Residual Earnings,and Equilibrium Firm Value with Asymmetric Information

The residual income valuation model (RIM) by Ohlson (1995) and Feltham and Ohlson (1995) assumes that investors are risk-neutral with homogenous beliefs. Thus, the present value of expected dividends represents firm value. The purpose of the present study is to derive a RIM in a market setting of the Kyle (1985) type. Since traders are asymmetrically informed in the Kyle setting, firm value is no longer equivalent to the present value of the firm's expected dividends. In the present model, the informed investor observes a signal about the firm's profitability, which the market maker (who sets the price) is unable to observe. The market maker infers the informed investor's private signal based on the total order flow, which is an informative but noisy signal. The analysis identifies the equilibrium firm value as a linear function of current book value, current residual income, and the aggregate order flow.     

Anticipated Earnings Announcements and the Customer–Supplier Anomaly

I test whether the anticipation of earnings news stimulates acquisition of customer information and mitigates returns to the customer–supplier anomaly documented by Cohen and Frazzini (“Economic Links and Predictable Returns.” The Journal of Finance 63 (2008): 1977–2011). I find that attention to a firm's publicly disclosed customers increases shortly before the firm announces earnings, and that customer stock returns predict supplier stock returns shortly before, but not after, the supplier's earnings announcement. I further find some evidence that these predictable returns are increasing in the level of customer information acquisition. These results are unique to anticipated disclosure events and suggest that anticipation of supplier earnings announcements resolves investor limited attention to customer information and accelerates price discovery of customer news.