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Earnings announcements and attention constraints: The role of market design

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  • Chakrabarty, Bidisha
  • Moulton, Pamela C.
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    Abstract

    We identify a new channel – market makers' attention constraints – through which earnings announcements for one stock affect the liquidity of other stocks. When some stocks handled by a designated market maker have earnings announcements, liquidity is lower for non-announcement stocks handled by the same market maker, with the largest effects coming from earnings surprises and stocks with high earnings response coefficients. Half of the liquidity decline reflects attention constraints binding on the individual market maker, and the other half is explained by the market maker's inventory. We further find that a market design change that increases automation alleviates the liquidity effect of attention constraints, despite an increase in the number of stocks allocated to each market maker.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Accounting and Economics.

    Volume (Year): 53 (2012)
    Issue (Month): 3 ()
    Pages: 612-634

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    Handle: RePEc:eee:jaecon:v:53:y:2012:i:3:p:612-634

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    Web page: http://www.elsevier.com/locate/jae

    Related research

    Keywords: Earnings announcements; Attention constraints; Liquidity; Automation; Inventory risk;

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    Cited by:
    1. Menkveld, Albert J., 2013. "High frequency trading and the new market makers," Journal of Financial Markets, Elsevier, vol. 16(4), pages 712-740.

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