Are Changes in Public and Private Information Precision Related to Changes in Market Liquidity Around Earnings Announcements?

40 Pages Posted: 26 Jan 2005

See all articles by Kiridaran (Giri) Kanagaretnam

Kiridaran (Giri) Kanagaretnam

York University - Schulich School of Business

Dennis J. Whalen

Otterbein College - Department of Business, Accounting & Economics

Gerald J. Lobo

University of Houston - C.T. Bauer College of Business

Date Written: March 2006

Abstract

We investigate the relations between changes in the precisions of public and private information and changes in market liquidity around earnings announcements. Increases in the precision of public information reduce information asymmetry, whereas increases in the precision of private information increase information asymmetry. Copeland and Galai (1983), Glosten and Milgrom (1985) and Kyle (1985) demonstrate that market liquidity decreases with increases in information asymmetry. Consequently, we hypothesize that changes in public information precision are positively related to changes in market liquidity and changes in private information precision are negatively related to changes in market liquidity. We employ percentage spreads and quoted depths to measure market liquidity and the measures proposed by Barron, Kim, Lim and Stevens (1998) to measure public and private information precision. Consistent with our hypotheses, we find that changes in the bid-ask spread are negatively related to changes in the precision of public information and positively related to changes in private information precision. Also consistent with our hypothesis, we find that changes in depth are negatively related to changes in the precision of private information. However, we do not find support for our hypothesis that changes in depth are positively related to changes in public information precision.

Keywords: Earnings announcements, market liquidity, bid-ask spread, depth, precision of public information, precision of private information

JEL Classification: M41, M45, G11, G12, G14, G32

Suggested Citation

Kanagaretnam, Kiridaran and Whalen, Dennis and Lobo, Gerald J., Are Changes in Public and Private Information Precision Related to Changes in Market Liquidity Around Earnings Announcements? (March 2006). Available at SSRN: https://ssrn.com/abstract=654685 or http://dx.doi.org/10.2139/ssrn.654685

Kiridaran Kanagaretnam

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

Dennis Whalen

Otterbein College - Department of Business, Accounting & Economics ( email )

One Otterbein
Westerville, OH 43081
United States
614-823-1161 (Phone)

Gerald J. Lobo (Contact Author)

University of Houston - C.T. Bauer College of Business ( email )

Houston, TX 77204-6021
United States
713-743-4838 (Phone)
713-743-4828 (Fax)

HOME PAGE: http://www.bauer.uh.edu/acct/acctprofile.asp?search=Gerald%20Lobo