How Is Earnings News Transmitted to Stock Prices?
50 Pages Posted: 1 Nov 2017 Last revised: 27 Jun 2018
Date Written: June 4, 2018
We study price formation in the after-hours market following earnings announcements for S\&P 1500 stocks from 2011 to 2015. Spreads are wide before announcements, already encompassing the new fundamental price, and gradually tighten around the updated price following announcements, leaving no profits for liquidity-takers other than trading against stale quotes. The tightening speed varies in firm size and the magnitude of earnings surprises. Prices incorporate earnings surprises before the opening of markets despite at times observing no trades, consistent with the theoretical view that quotes reveal public information. We further show that price pressure following the opening of markets can generate mispricing.
Keywords: after-hours trading, earnings announcements, liquidity, order flow, price discovery
JEL Classification: G10, G12, G14
Suggested Citation: Suggested Citation