Passive Informed Trading Around Earnings Announcements
47 Pages Posted: 18 Dec 2018
Date Written: October 17, 2018
Using a sample of NASDAQ firms we investigate informed trading in the limit order book prior to earnings announcements. Consistent with recent limit order theory, and in contrast to classic adverse selection models, we show that informed traders supply liquidity. Relative to a sample of low-shock announcement firms as a control, we find that for high-shock firms, the spread is lower, the correlation of bid and ask depth is higher, the implied cost of trading is lower, and the information share component of the limit order book is higher. Informed traders have lower adverse selection cost and therefore supply liquidity.
Keywords: Informed Trading, Limit Order Book, Earnings Announcements
JEL Classification: G10, G14
Suggested Citation: Suggested Citation