How Is Earnings News Transmitted to Stock Prices?
50 Pages Posted: 1 Nov 2017 Last revised: 12 Dec 2018
Date Written: December 10, 2018
We study price formation around earnings announcements for S\&P 1500 stocks from 2011 to 2015 to understand the relationship between liquidity and price efficiency. Earnings are announced in the after-hours market, an illiquid trading environment with low trading volume. Bid-ask spreads are wide before announcements and the narrowing of spreads post-announcement is asymmetric: ask (bid) prices update instantaneously after positive (negative) news, while the other side is slower to adjust. On average, pre-announcement spreads include the post-announcement midquote price, leaving no profits for liquidity-takers. Stock prices fully reflect earnings surprises before the opening of markets even when there are no trades.
Keywords: after-hours trading, earnings announcements, liquidity, order flow, price discovery
JEL Classification: G10, G12, G14
Suggested Citation: Suggested Citation