The Evolution of Financial Market Efficiency: Evidence from Earnings Announcements

Abstract

Stock prices following earnings announcements have become more efficient. Prices on announcement dates incorporate more quickly earnings surprises, leading to the disappearance of post-announcement price drifts. Evidence suggests that trading frictions commonly associated with market inefficiencies following earnings announcements have weakened with the growing presence of sophisticated liquidity providers at processing news. Prices on announcement date further reflect more accurately future prices. The dynamics of market efficiency over time implies that studies about price efficiency be conducted separately over different periods. Aggregating long time-series can highlight the presence of market inefficiencies when, in recent years, such inefficiencies have vanished.

Keywords: earnings announcements, market efficiency, price discovery, price informativeness

JEL Classification: G10, G12, G14