How Is Earnings News Transmitted to Stock Prices?
70 Pages Posted: 1 Nov 2017 Last revised: 13 Nov 2017
Date Written: November 11, 2017
We study price formation around earnings announcements for S&P 1500 stocks from 2011 to 2015 using high-frequency, order-level data. We find that price discovery takes place in the after-hours market and is complete before the opening auction, or by 10 a.m. for stocks that have no after-hours trades. Initial price reactions occur upon the arrival of the first trades and are explained by earnings surprises, not by liquidity-taking order flow, consistent with the theoretical view that news can incorporate prices instantly. Moreover, sophisticated liquidity providers are active and profitable at that time. Despite fast price discovery, following big surprises, we find significant price drifts in the after-hours market, which we relate to theoretical work on information processing.
Keywords: after-hours trading, earnings announcements, liquidity, order flow, price discovery
JEL Classification: G10, G12, G14
Suggested Citation: Suggested Citation