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Earnings Announcements and Market Depth

Author

Listed:
  • ROBERT BUSHMAN
  • SUNIL DUTTA
  • JOHN HUGHES
  • RAFFI INDJEJIKIAN

Abstract

. This paper investigates how strategic trading around the time of earnings announcements affects market liquidity (e.g., bid†ask spreads). We model an investor with private information in advance of an earnings announcement (e.g., inside information). The investor trades before and after the earnings announcement in a market populated by liquidity†motivated traders who have some discretion over the timing of their trades. The main result of the analysis is that an earnings announcement that reduces an insider's private information may lead to a less liquid market in the postannouncement period.

Suggested Citation

  • Robert Bushman & Sunil Dutta & John Hughes & Raffi Indjejikian, 1997. "Earnings Announcements and Market Depth," Contemporary Accounting Research, John Wiley & Sons, vol. 14(1), pages 43-68, March.
    • Handle: RePEc:wly:coacre:v:14:y:1997:i:1:p:43-68
    DOI: 10.1111/j.1911-3846.1997.tb00519.x
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    References listed on IDEAS

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    1. Foster, F Douglas & Viswanathan, S, 1990. "A Theory of the Interday Variations in Volume, Variance, and Trading Costs in Securities Markets," The Review of Financial Studies, Society for Financial Studies, vol. 3(4), pages 593-624.
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    7. Venkatesh, P C & Chiang, R, 1986. "Information Asymmetry and the Dealer's Bid-Ask Spread: A Case Study of Earnings and Dividend Announcements," Journal of Finance, American Finance Association, vol. 41(5), pages 1089-1102, December.
    8. Krinsky, Itzhak & Lee, Jason, 1996. "Earnings Announcements and the Components of the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 51(4), pages 1523-1535, September.
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    Cited by:

    1. Huddart, Steven & Hughes, John S. & Brunnermeier, Markus, 1999. "Disclosure requirements and stock exchange listing choice in an international context," Journal of Accounting and Economics, Elsevier, vol. 26(1-3), pages 237-269, January.
    2. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
    3. Chen, Langnan & Luo, Jiawen & Liu, Hao, 2013. "The determinants of liquidity with G-RJMCMC-VS model: Evidence from China," Economic Modelling, Elsevier, vol. 35(C), pages 192-198.
    4. Todd A. Finkle & Laurence E. Blose & Reinhold P. Lam, 2005. "Insider Trading Around New Drug Approvals," Journal of Private Enterprise, The Association of Private Enterprise Education, vol. 21(Fall 2005), pages 29-45.
    5. Yu Cong & Rani Hoitash & Murugappa Krishnan, 2010. "Event study with imperfect competition and private information: earnings announcements revisited," Review of Quantitative Finance and Accounting, Springer, vol. 34(3), pages 383-411, April.

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