Does Internet Research Activity by Sophisticated Investors Lead to Heightened Adverse Selection?
59 Pages Posted: 31 Dec 2019
Date Written: December 2, 2019
We provide direct evidence of an association between the internet research activity of sophisticated investors around public announcements and heightened adverse selection. Prior literature finds that adverse selection increases at public announcements (Lee et al. 1993; Kim and Verrecchia 1994). The posited mechanism is that earnings announcements allow a subset of traders to make superior assessments of firm value based on the disclosure. Using a unique dataset of internet research activity on business media sites matched to the IP addresses of investors, we provide support for this mechanism by identifying a positive relation between pre-earnings announcement information gathering of sophisticated investors and illiquidity at the time of the announcement. As predicted by Kim and Verrecchia (1994), illiquidity increases at the time of the announcement as the intensity of information gathering increases. In supplemental analyses, we continue to find support for business media content on the internet as a source of complementary information in interpreting earnings announcement.
Keywords: earnings announcements, adverse selection, sophisticated investors, media, liquidity, information acquisition, technology
JEL Classification: G14, M41, D83
Suggested Citation: Suggested Citation