How Is Earnings News Transmitted to Stock Prices?

53 Pages Posted: 1 Nov 2017 Last revised: 16 Aug 2018

Vincent Gregoire

HEC Montreal - Department of Finance

Charles Martineau

University of Toronto

Date Written: August 7, 2018

Abstract

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. Spreads are wider before announcements and narrow more slowly after announcements for small firms. The narrowing of spreads is driven by one side of the quote as ask (bid) prices update instantaneously after positive (negative) news. On average, pre-announcement spreads include the post-announcement midquote, leaving no profits for liquidity traders other than trading against stale quotes. Midquote prices fully reflect earnings surprises before the opening of markets even if there are no trades.

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? (August 7, 2018). 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 ( email )

105 St-George
Toronto, Ontario M5S3E6
Canada

HOME PAGE: http://charlesmartineau.com

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