How Is Earnings News Transmitted to Stock Prices?
48 Pages Posted: 1 Nov 2017 Last revised: 22 Jun 2020
Date Written: June 20, 2020
Most corporate news occurs in the after-hours market, a very illiquid trading environment. We examine the relationship between liquidity and price discovery around after-hours earnings announcements. Prices reflect earnings surprises through changes in quotes rather than through trades. Following announcements, ask (bid) prices adjust quickly to positive (negative) surprises while bid (ask) prices are slower to adjust. Returns computed from trade prices underestimate the speed and magnitude of price reactions following announcements relative to midquote returns. These findings emphasize the importance of using quotes and not trade prices when studying price discovery in the after-hours market. This is especially crucial when there are confounding events, which we illustrate using analyst recommendation revisions.
Keywords: after-hours trading, disclosure, earnings announcements, liquidity, price discovery
JEL Classification: G10, G12, G14, M41
Suggested Citation: Suggested Citation