How Is Earnings News Transmitted to Stock Prices?
54 Pages Posted: 1 Nov 2017 Last revised: 15 Dec 2019
Date Written: December 13, 2019
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: Suggested Citation