Asymmetric Trading Costs Prior to Earnings Announcements: Implications for Price Discovery and Returns

Posted: 5 May 2018

See all articles by Travis L. Johnson

Travis L. Johnson

The University of Texas at Austin

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: March 1, 2018

Abstract

We show that the cost of trading on negative news, relative to positive news, increases before earnings announcements. Our evidence suggests that this asymmetry is due to financial intermediaries reducing their exposure to announcement risks by providing liquidity asymmetrically. This asymmetry creates a predictable upward bias in prices that increases preannouncement, and subsequently reverses, confounding short‐window announcement returns as measures of earnings news and risk premia. These findings provide an alternative explanation for asymmetric return reactions to firms' earnings news, and help explain puzzling prior evidence that announcement risk premia precede the actual announcements. Our study informs methods for research centering on earnings announcements and offers a possible explanation for patterns in returns around anticipated periods of heightened inventory risks, including alternative firm‐level, industry‐level, and macroeconomic information events.

Keywords: Earnings Announcements; Liquidity Provision; Transaction Costs; Announcement Returns; Risk Premia; Bad News; Asymmetric Reaction

JEL Classification: E44; G12; G14; G21; M40; M41

Suggested Citation

Johnson, Travis L. and So, Eric C., Asymmetric Trading Costs Prior to Earnings Announcements: Implications for Price Discovery and Returns (March 1, 2018). Journal of Accounting Research, Vol. 56, No. 1, 2018. Available at SSRN: https://ssrn.com/abstract=3165698

Travis L. Johnson (Contact Author)

The University of Texas at Austin ( email )

2110 Speedway Stop B6600
Austin, TX Texas 78712
United States
6178995325 (Phone)

HOME PAGE: http://travislakejohnson.com

Eric C. So

Massachusetts Institute of Technology (MIT) - Sloan School of Management ( email )

100 Main Street
E62-416
Cambridge, MA 02142
United States

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