How Is Earnings News Transmitted to Stock Prices?
48 Pages Posted: 1 Nov 2017 Last revised: 21 Jun 2019
Date Written: June 19, 2019
The most anticipated firms’ disclosures are often released in the after-hours market, a very illiquid trading environment. We examine the relationship between liquidity and market efficiency around earnings announced outside of regular trading hours. We find that price discovery of earnings surprises occurs through changes in quotes rather than through trades. 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 to reflect positive (negative) surprises while bid (ask) prices are slower to adjust. This asymmetry generates price drifts in midquotes. Our results suggest that using midquotes to examine market efficiency in illiquid markets underestimates the true speed of price discovery.
Keywords: after-hours trading, disclosure, earnings announcements, liquidity, price discovery
JEL Classification: G10, G12, G14, M41
Suggested Citation: Suggested Citation