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
Date Written: August 11, 2013
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: Suggested Citation