How Is Earnings News Transmitted to Stock Prices?

50 Pages Posted: 1 Nov 2017 Last revised: 8 Jun 2018

Vincent Gregoire

University of Melbourne - Department of Finance

Charles Martineau

University of Toronto

Date Written: June 4, 2018

Abstract

We study price formation in the after-hours market following earnings announcements for S\&P 1500 stocks from 2011 to 2015. Spreads are wide before announcements, already encompassing the new fundamental price. Following earnings surprises, spreads gradually tighten around the new fundamental price, leaving no profits for liquidity-takers other than trading against stale quotes. The speed in price discovery varies in firm size and in the magnitude of the surprise. Our results show that price discovery is complete before the opening of markets despite, at times, observing no trades and support the theoretical view that prices incorporate news directly through quote adjustments.

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? (June 4, 2018). Available at SSRN: https://ssrn.com/abstract=3060094 or http://dx.doi.org/10.2139/ssrn.3060094

Vincent Gregoire

University of Melbourne - Department of Finance ( email )

Faculty of Economics and Commerce
Parkville, Victoria 3010 3010
Australia

Charles Martineau (Contact Author)

University of Toronto ( email )

105 St-George
Toronto, Ontario M5S3E6
Canada

HOME PAGE: http://charlesmartineau.com

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