Earnings Announcements and Attention Constraints: The Role of Market Design

53 Pages Posted: 11 Mar 2009 Last revised: 12 Jan 2012

See all articles by Bidisha Chakrabarty

Bidisha Chakrabarty

Saint Louis University - Richard A. Chaifetz School of Business

Pamela C. Moulton

Cornell University - SC Johnson College of Business

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Date Written: January 10, 2012

Abstract

We identify a new channel – market makers’ attention constraints – through which earnings announcements for one stock affect the liquidity of other stocks. When some stocks handled by a designated market maker have earnings announcements, liquidity is lower for non-announcement stocks handled by the same market maker, with the largest effects coming from earnings surprises and stocks with high earnings response coefficients. Half of the liquidity decline reflects attention constraints binding on the individual market maker, and the other half is explained by the market maker's inventory. We further find that a market design change that increases automation alleviates the liquidity effect of attention constraints, despite an increase in the number of stocks allocated to each market maker.

Keywords: earnings announcements, disclosure, attention constraints, limited attention, dedicated market makers, liquidity

JEL Classification: G14, G29

Suggested Citation

Chakrabarty, Bidisha and Moulton, Pamela C., Earnings Announcements and Attention Constraints: The Role of Market Design (January 10, 2012). Available at SSRN: https://ssrn.com/abstract=1357338 or http://dx.doi.org/10.2139/ssrn.1357338

Bidisha Chakrabarty

Saint Louis University - Richard A. Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO MO 63108-3397
United States
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3149771479 (Fax)

HOME PAGE: http://business.slu.edu/departments/finance/faculty-staff/bidisha-chakrabarty

Pamela C. Moulton (Contact Author)

Cornell University - SC Johnson College of Business ( email )

Ithaca, NY 14853
United States

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