56 Pages Posted: 2 Apr 2014 Last revised: 11 Jan 2017
Date Written: January 10, 2017
We show the cost of trading on negative news relative to positive news increases prior to earnings announcements. Our evidence suggests this asymmetry is due to financial intermediaries reducing their exposure to announcement risks by providing liquidity asymmetrically. The asymmetry creates a predictable upward bias in price discovery and returns that increases pre-announcement and subsequently reverses, confounding short-window announcement returns as measures of earnings news and risk premia. Our findings provide a link between trading behavior, return patterns, and the information content of prices around earnings announcements, and help explain several puzzling results in prior research. Finally, we provide evidence that our frictions-based theory helps explain well-documented patterns in Friday asset returns and earnings announcement timing.
Keywords: Earnings announcements, announcement premia, liquidity, market making, intermediaries
JEL Classification: G10, G11, G12, G14, M41
Suggested Citation: Suggested Citation
Johnson, Travis L. and So, Eric C., Asymmetric Trading Costs Prior to Earnings Announcements: Implications for Price Discovery and Returns (January 10, 2017). Available at SSRN: https://ssrn.com/abstract=2419284 or http://dx.doi.org/10.2139/ssrn.2419284