How Is Earnings News Transmitted to Stock Prices?

54 Pages Posted: 1 Nov 2017 Last revised: 15 Dec 2019

See all articles by Vincent Gregoire

Vincent Gregoire

HEC Montreal - Department of Finance

Charles Martineau

University of Toronto - Rotman School of Management and UTSC Management

Date Written: December 13, 2019

Abstract

Most corporate news occurs in the after-hours market, a very illiquid trading environment. We examine the relationship between liquidity and market efficiency around after-hours earnings announcements. Prices reflect earnings surprises through changes in quotes rather than through trades. Pre-announcement bid-ask spreads are wide enough to include the post-announcement closing price, eliminating the profits of informed liquidity-takers. Following announcements, ask (bid) prices adjust quickly to reflect positive (negative) surprises while bid (ask) prices are slower to adjust. These findings emphasize the importance of examining the adjustments in quotes and not in trade prices to infer about the price discovery process.

Keywords: after-hours trading, disclosure, earnings announcements, liquidity, price discovery

JEL Classification: G10, G12, G14, M41

Suggested Citation

Gregoire, Vincent and Martineau, Charles, How Is Earnings News Transmitted to Stock Prices? (December 13, 2019). Available at SSRN: https://ssrn.com/abstract=3060094 or http://dx.doi.org/10.2139/ssrn.3060094

Vincent Gregoire

HEC Montreal - Department of Finance ( email )

3000 Chemin de la Cote-Sainte-Catherine
Montreal, Quebec H3T 2A7
Canada

Charles Martineau (Contact Author)

University of Toronto - Rotman School of Management and UTSC Management ( email )

105 St-George
Toronto, Ontario M5S3E6
Canada

HOME PAGE: http://charlesmartineau.com

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