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 public information (earnings surprises), leading to a gradual disappearance of post-announcement price drifts, and reflect more accurately future prices over time. Evidence suggests that the growth in high-frequency trading played an essential role in diminishing frictions commonly associated with market inefficiencies following earnings announcements. 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: disclosure, earnings announcements, market efficiency, price discovery, price informativeness

JEL Classification: G10, G12, G14