How Is Earnings News Transmitted to Stock Prices?

48 Pages Posted: 1 Nov 2017 Last revised: 22 Jun 2020

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 20, 2020

Abstract

Most corporate news occurs in the after-hours market, a very illiquid trading environment. We examine the relationship between liquidity and price discovery around after-hours earnings announcements. Prices reflect earnings surprises through changes in quotes rather than through trades. Following announcements, ask (bid) prices adjust quickly to positive (negative) surprises while bid (ask) prices are slower to adjust. Returns computed from trade prices underestimate the speed and magnitude of price reactions following announcements relative to midquote returns. These findings emphasize the importance of using quotes and not trade prices when studying price discovery in the after-hours market. This is especially crucial when there are confounding events, which we illustrate using analyst recommendation revisions.

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 20, 2020). 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

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