How Is Earnings News Transmitted to Stock Prices?
50 Pages Posted: 1 Nov 2017 Last revised: 8 Jun 2018
Date Written: June 4, 2018
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: Suggested Citation