News-Driven Return Reversals: Liquidity Provision Ahead of Earnings Announcements

38 Pages Posted: 9 Jun 2013 Last revised: 14 Jun 2014

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Sean Wang

Rice University

Date Written: February 10, 2014

Abstract

This study documents a six-fold increase in short-term return reversals during earnings announcements relative to non-announcement periods. Following prior research, we use reversals as a proxy for expected returns market makers demand for providing liquidity. Our findings highlight significant time-series variation in the magnitude of short-term return reversals and suggest that market makers demand higher expected returns prior to earnings announcements because of increased inventory risks that stem from holding net positions through the release of anticipated earnings news. Collectively, our findings suggest that uncertainty regarding anticipated information events elicits predictable increases in expected returns to liquidity provision and that these increases significantly affect the dynamics and information content of market prices.

Suggested Citation

So, Eric C. and Wang, Sean, News-Driven Return Reversals: Liquidity Provision Ahead of Earnings Announcements (February 10, 2014). Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=2275982 or http://dx.doi.org/10.2139/ssrn.2275982

Eric C. So (Contact Author)

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

77 Massachusetts Ave.
E62-416
Cambridge, MA 02142
United States

Sean Wang

Rice University ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

HOME PAGE: http://business.rice.edu/person/sean-wang

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