How Is Earnings News Transmitted to Stock Prices?

48 Pages Posted: 1 Nov 2017 Last revised: 21 Jun 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: June 19, 2019

Abstract

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

Gregoire, Vincent and Martineau, Charles, How Is Earnings News Transmitted to Stock Prices? (June 19, 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
280
Abstract Views
1,546
rank
107,826
PlumX Metrics