Asymmetric Trading Costs Prior to Earnings Announcements: Implications for Price Discovery and Returns

57 Pages Posted: 2 Apr 2014 Last revised: 31 Oct 2017

Travis L. Johnson

University of Texas at Austin - Department of Finance

Eric C. So

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

Multiple version iconThere are 2 versions of this paper

Date Written: October 30, 2017

Abstract

We show the cost of trading on negative news, relative to positive news, increases before earnings announcements. Our evidence suggests this asymmetry is due to financial intermediaries reducing their exposure to announcement risks by providing liquidity asymmetrically. This asymmetry creates a predictable upward bias in prices that increases pre-announcement and subsequently reverses, confounding short-window announcement returns as measures of earnings news and risk premia. These findings provide an alternative explanation for asymmetric return reactions to firms' earnings news, and help explain puzzling prior evidence that announcement risk premia precede the actual announcements. Our study informs methods for research centering on earnings announcements and offers a possible explanation for patterns in returns around anticipated periods of heightened inventory risks, including alternative firm-level, industry-level, and macroeconomic information events.

Keywords: Earnings announcements, announcement premia, liquidity, market making, intermediaries

JEL Classification: G10, G11, G12, G14, M41

Suggested Citation

Johnson, Travis L. and So, Eric C., Asymmetric Trading Costs Prior to Earnings Announcements: Implications for Price Discovery and Returns (October 30, 2017). Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2419284 or http://dx.doi.org/10.2139/ssrn.2419284

Travis L. Johnson (Contact Author)

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States

HOME PAGE: http://faculty.mccombs.utexas.edu/johnson

Eric C. So

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

100 Main Street
E62-416
Cambridge, MA 02142
United States

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