Effects of Earnings Announcements on Liquidity and Price Efficiency: New Evidence from ASC 606

Abstract

The implementation of the new revenue recognition standard (ASC 606) has significantly changed the impact of earnings announcements on liquidity and price efficiency. We show that earning announcements are accompanied by larger decreases in the bid-ask spread, the price impact of trades, return volatility, and larger increases in the quoted depth, trading volume, and price efficiency after implementing ASC 606. These results indicate that ASC 606 has improved the informativeness of earnings and changed the effect of earnings announcements on the firm’s information and trading environments accordingly.

Keywords: Liquidity, Information asymmetry, Revenue recognition standard, ASC 606, Earnings announcements, Earnings informativeness

JEL Classification: G10, G14, G18, M41, M48