Dark trading and post earnings announcement drift

Management Science

Posted: 1 Aug 2018 Last revised: 17 Sep 2020

See all articles by Jacob K. Thomas

Jacob K. Thomas

Yale School of Management

Frank Zhang

Yale School of Management

Wei Zhu

University of Illinois at Urbana-Champaign - Department of Accountancy

Date Written: August 15, 2020

Abstract

Both theory and evidence are mixed regarding the impact on prices of trading on “dark” venues partially exempt from National Market System requirements. Theory predicts that price discovery improves as dark venues siphon noisy uninformed trades, but increased adverse selection reduces liquidity. Empirical studies, which focus on intraday inefficiency, also find contradictory results. We extend that literature to investigate the impact of dark trading on a longstanding inefficiency based on underreaction to quarterly earnings. We study a randomized controlled trial created by the “trade-at” rule of the SEC’s Tick Size Pilot Program that exogenously shocks dark trading. We supplement that with OLS and 2SLS regressions on a more representative Compustat/CRSP sample. All our results suggest that underreaction increases with dark trading, consistent with reduced liquidity limiting arbitrage. We contribute to the literatures on dark trading and inefficient processing of accounting disclosures, highlighting the role of advances in trading technology.

Keywords: Dark trading; Post-earnings-announcement-drift; Arbitrage costs; Price efficiency

JEL Classification: G12; G14

Suggested Citation

Thomas, Jacob and Zhang, Frank and Zhu, Wei, Dark trading and post earnings announcement drift (August 15, 2020). Management Science, Available at SSRN: https://ssrn.com/abstract=3223528 or http://dx.doi.org/10.2139/ssrn.3223528

Jacob Thomas

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Frank Zhang

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

Wei Zhu (Contact Author)

University of Illinois at Urbana-Champaign - Department of Accountancy ( email )

1206 South Sixth Street
Champaign, IL 61820
United States

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