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Liquidity and earnings in event studies: Does data granularity matter?

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  • Bohmann, Marc
  • Michayluk, David
  • Patel, Vinay
  • Walsh, Kathleen

Abstract

Market microstructure data availability has significantly improved over time and it is now possible to estimate liquidity measures at the nanosecond level. However, this level of data is unavailable in all markets and time periods and there is a significant cost and computational burden of high-frequency data. Goyenko et al. (2009) and Fong et al. (2017) show that various low-frequency liquidity measures can proxy for high-frequency benchmarks and show that the results are robust across countries and time. However, liquidity measures do not always behave in the expected fashion during periods of information asymmetry (Collin-Dufresne and Fos, 2015). Drawing from Ball and Brown (1968), we use an event study methodology to investigate whether the low-frequency measures of liquidity can proxy for high-frequency measures around earnings announcements (i.e., periods of information asymmetry). We find that the Closing-Price-Quoted-Spread is the best proxy for the percent-cost high-frequency benchmarks. In contrast, using cross-sectional, portfolio and individual time-series correlations the most consistent low-frequency cost-per-dollar proxies are the High-Low-Impact and Closing-Price-Quoted-Spread-Impact, however, the performance of these proxies weakens in the pre- and post-announcement periods around the earnings announcement.

Suggested Citation

  • Bohmann, Marc & Michayluk, David & Patel, Vinay & Walsh, Kathleen, 2019. "Liquidity and earnings in event studies: Does data granularity matter?," Pacific-Basin Finance Journal, Elsevier, vol. 54(C), pages 118-131.
    • Handle: RePEc:eee:pacfin:v:54:y:2019:i:c:p:118-131
    DOI: 10.1016/j.pacfin.2018.12.007
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    2. Robert W. Faff, 2019. "Adopting a Structured Abstract Design to More Effectively Catch Reader Attention: An Application of the Pitching Research® Framework," Capital Markets Review, Malaysian Finance Association, vol. 27(2), pages 1-13.
    3. Marc Bohmann & Vinay Patel, 2020. "Information Leakage in Energy Derivatives around News Announcements," Published Paper Series 2020-2, Finance Discipline Group, UTS Business School, University of Technology, Sydney.
    4. Marc J. M. Bohmann & Vinay Patel, 2022. "Informed options trading prior to FDA announcements," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(7-8), pages 1211-1236, July.
    5. Robert Faff & Tim Kastelle & Micheal Axelsen & Mark Brosnan & Rebecca Michalak & Kathleen Walsh, 2021. "Pitching research for engagement and impact: a simple tool and illustrative examples," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(2), pages 3329-3383, June.
    6. Alexandre Ripamonti & Raphael Videira & Denis Ichimura, 2020. "Asymmetric information and daily stock prices in Brazil," Estudios Gerenciales, Universidad Icesi, vol. 36(157), pages 465-472, December.

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