Market Reaction to Earnings News: A Unified Test of Information Risk and Transaction Costs

41 Pages Posted: 12 Aug 2013 Last revised: 8 Jan 2014

See all articles by Qi Zhang

Qi Zhang

Independent

Charlie X. Cai

University of Liverpool Management School

Kevin Keasey

University of Leeds - Division of Accounting and Finance

Date Written: August 11, 2013

Abstract

We examine how information risk and transaction costs influence the initial and subsequent market reaction to earnings news. We find that the initial market reaction is higher per unit of earnings surprise for higher information risk firms (information content effect). Furthermore, it is information risk that induces transaction costs that limit the initial market reaction and lead to higher subsequent drift (transaction costs effect). Information risk does not have an effect on drift beyond that achieved through transaction costs. Our findings highlight the importance of understanding the linkage between information risk and transaction costs in price discovery around public disclosure.

Keywords: information risk, transaction costs, price discovery, earnings announcements

JEL Classification: G11, G12, G14

Suggested Citation

Zhang, Qi and Cai, Charlie Xiaowu and Keasey, Kevin, Market Reaction to Earnings News: A Unified Test of Information Risk and Transaction Costs (August 11, 2013). Journal of Accounting and Economics 56 (2013) 251–266. Available at SSRN: https://ssrn.com/abstract=2308635

Qi Zhang

Independent

No Address Available

Charlie Xiaowu Cai (Contact Author)

University of Liverpool Management School ( email )

University of Liverpool
Liverpool, L69 7ZA
United Kingdom

Kevin Keasey

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom
+44 (0)113 343 2618 (Phone)

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