Do Designated Market Makers Facilitate Price Informativeness? Evidence from Earnings Announcements

51 Pages Posted: 6 Apr 2022

See all articles by Neil Bhattacharya

Neil Bhattacharya

Southern Methodist University (SMU) - Accounting Department

Bidisha Chakrabarty

Saint Louis University - Richard A. Chaifetz School of Business

Lei Ma

Southern Illinois University - Southern Illinois University at Carbondale

Jing Pan

Pennsylvania State University - Department of Accounting

Date Written: March 17, 2022

Abstract

Designated market makers (DMMs) are contractually obligated to increase liquidity provision when trading volume breaches a floor. Using this feature in a regression discontinuity design, we show that increased DMM participation facilitates price informativeness with respect to earnings news. Enhanced DMM participation is associated with greater informed trading, as evidenced by more short selling on negative news and more SEC EDGAR searches before earnings announcements. DMM effects are stronger when market uncertainty is high, capital constraints are tight, and in down markets. Our results highlight the value of obligatory liquidity provision during scheduled corporate events with high fundamental information flows.

Keywords: Designated Market Makers; Earning Announcements; Jump Ratio; Return Synchronicity; Regression Discontinuity

JEL Classification: G02, G10, G14, M40, M41

Suggested Citation

Bhattacharya, Neil and Chakrabarty, Bidisha and Ma, Lei and Pan, Jing, Do Designated Market Makers Facilitate Price Informativeness? Evidence from Earnings Announcements (March 17, 2022). SMU Cox School of Business Research Paper No. 22-10, Available at SSRN: https://ssrn.com/abstract=4060375 or http://dx.doi.org/10.2139/ssrn.4060375

Neil Bhattacharya

Southern Methodist University (SMU) - Accounting Department ( email )

Bidisha Chakrabarty

Saint Louis University - Richard A. Chaifetz School of Business ( email )

3674 Lindell Blvd
St. Louis, MO MO 63108-3397
United States
3149773607 (Phone)
3149771479 (Fax)

HOME PAGE: http://business.slu.edu/departments/finance/faculty-staff/bidisha-chakrabarty

Lei Ma

Southern Illinois University - Southern Illinois University at Carbondale ( email )

Rehn Hall - Mail Code 4626
Carbondale, IL Illinois 62901-4515
United States

Jing Pan (Contact Author)

Pennsylvania State University - Department of Accounting ( email )

University Park, PA 16802-3306
United States

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