How Is Earnings News Transmitted to Stock Prices?

50 Pages Posted: 1 Nov 2017 Last revised: 27 Jun 2018

Vincent Gregoire

HEC Montreal - Department of Finance

Charles Martineau

University of Toronto

Date Written: June 4, 2018

Abstract

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

Gregoire, Vincent and Martineau, Charles, How Is Earnings News Transmitted to Stock Prices? (June 4, 2018). Available at SSRN: https://ssrn.com/abstract=3060094 or http://dx.doi.org/10.2139/ssrn.3060094

Vincent Gregoire

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Charles Martineau (Contact Author)

University of Toronto ( email )

105 St-George
Toronto, Ontario M5S3E6
Canada

HOME PAGE: http://charlesmartineau.com

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