Do Designated Market Makers Facilitate Price Informativeness? Evidence from Earnings Announcements
51 Pages Posted: 6 Apr 2022
Date Written: March 17, 2022
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: Suggested Citation