Asymmetric Decrease in Liquidity Trading before Earnings Announcements and the Announcement Return Premium

Posted: 3 Feb 2013 Last revised: 20 Aug 2015

See all articles by Shai Levi

Shai Levi

Tel Aviv University

Xiao-Jun Zhang

University of California, Berkeley - Accounting Group; China Academy of Financial Research (CAFR)

Date Written: June 18, 2015

Abstract

Investors are reluctant to trade in the high-information-asymmetry days before earnings announcements. We show that the decrease in liquidity trading before announcements is asymmetric. We analyze buy and sell orders of investors with passive investment strategies, and find they do not reduce their sales as much as their purchases in the days before announcements. Investors needing liquidity sell stocks at a discount relative to the post-announcement price, and these preannouncement liquidity sales are a significant driver of the average positive returns, or return premium, known to characterize announcement days.

Keywords: Earnings announcement premium; liquidity

JEL Classification: G12, G14

Suggested Citation

Levi, Shai and Zhang, Xiao-Jun, Asymmetric Decrease in Liquidity Trading before Earnings Announcements and the Announcement Return Premium (June 18, 2015). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2210748 or http://dx.doi.org/10.2139/ssrn.2210748

Shai Levi (Contact Author)

Tel Aviv University ( email )

Tel Aviv, 69978
Israel

Xiao-Jun Zhang

University of California, Berkeley - Accounting Group ( email )

545 Student Services Building
SPC 1900
Berkeley, CA 94720
United States
(510) 642-4789 (Phone)
(510) 642-4700 (Fax)

China Academy of Financial Research (CAFR)

1954 Huashan Road
Shanghai P.R.China, 200030
China

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