How Is Earnings News Transmitted to Stock Prices?

49 Pages Posted: 1 Nov 2017 Last revised: 10 Apr 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: April 8, 2019

Abstract

Most firm-level news is announced in the after-hours market, a very illiquid trading environment. We study price formation around earnings announcements to understand the relationship between liquidity and market efficiency in this environment. Price discovery occurs through changes in quotes, not through trading. Pre-announcement bid-ask spreads are wide enough to eliminate profits of informed liquidity-takers. Spreads narrow following announcements but do so asymmetrically: ask (bid) prices adjust quickly and efficiently reflect positive (negative) surprises while bid (ask) prices are slower to adjust. This asymmetry generates midquote price drifts, highlighting limitations of using midquotes for examining price discovery of illiquid assets.

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

JEL Classification: G10, G12, G14

Suggested Citation

Gregoire, Vincent and Martineau, Charles, How Is Earnings News Transmitted to Stock Prices? (April 8, 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

Register to save articles to
your library

Register

Paper statistics

Downloads
260
rank
114,618
Abstract Views
1,373
PlumX Metrics