How Is Earnings News Transmitted to Stock Prices?

Journal of Accounting Research, forthcoming

47 Pages Posted: 1 Nov 2017 Last revised: 5 Aug 2021

See all articles by Vincent Gregoire

Vincent Gregoire

HEC Montreal - Department of Finance

Charles Martineau

University of Toronto - Rotman School of Management and UTSC Management

Date Written: June 14, 2021

Abstract

We examine the speed and mechanism of the price discovery process following earnings announcements in the after-hours market, a very illiquid trading environment. Prices reflect earnings surprises mostly through changes in quotes rather than through trades. Following positive announcement surprises, ask prices adjust quickly while bid prices are slower to adjust, and vice versa for negative surprises. Returns computed from trade prices underestimate the speed and magnitude of price reactions following announcements relative to returns computed from quotes. These findings emphasize the importance of using quotes and not trade prices when examining intraday price discovery. Because firm announcements such as earnings generally occur in the after-hours market, using quotes is crucial as trading is sparse. We further illustrate the importance of quotes when examining the price discovery process around analyst recommendation revisions.

Keywords: after-hours trading, analyst revisions, disclosure, earnings announcements, liquidity, price discovery

JEL Classification: G10, G12, G14, M41

Suggested Citation

Gregoire, Vincent and Martineau, Charles, How Is Earnings News Transmitted to Stock Prices? (June 14, 2021). Journal of Accounting Research, forthcoming, 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 - Rotman School of Management and UTSC Management ( email )

105 St-George
Toronto, Ontario M5S3E6
Canada

HOME PAGE: http://charlesmartineau.com

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