Passive Informed Trading Around Earnings Announcements

47 Pages Posted: 18 Dec 2018

See all articles by James Upson

James Upson

University of Texas at El Paso

Brian Roseman

Oklahoma State University

Date Written: October 17, 2018

Abstract

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

Upson, James and Roseman, Brian, Passive Informed Trading Around Earnings Announcements (October 17, 2018). Available at SSRN: https://ssrn.com/abstract=3302933

James Upson (Contact Author)

University of Texas at El Paso ( email )

500 West University
El Paso, TX 79968-0545
United States

Brian Roseman

Oklahoma State University ( email )

Stillwater, OK 74078
United States

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