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Changes in The Bid-Ask Components Around Earnings Announcements: Evidence from the Copenhagen Stock Exchange

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Author Info

  • Voetmann, Torben

    (Department of Finance, Copenhagen Business School)

Abstract

This paper investigates the relative magnitude of the components in the bid-ask spread around earnings announcements using the method in Stoll (1989). The results show that earnings surprises convey relevant pricing information and that significant information asymmetry exists between the market makers and the informed traders. Around negative earnings announcements the adverse-selection component and the trading volume increase while the inventory-holding and order-processing components decrease. This leads to a decrease in the realized spread. The magnitude of the change in the realized spread appears to be important but the change in the quoted bid-ask spread is negligible. The overall result implies that the informed traders’ ability to assess firms’ performance only affect the bid-ask spread around the time of the earnings announcements.

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File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7178
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Bibliographic Info

Paper provided by Copenhagen Business School, Department of Finance in its series Working Papers with number 2000-6.

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Length: 28 pages
Date of creation: 03 May 2001
Date of revision:
Handle: RePEc:hhs:cbsfin:2000_006

Contact details of provider:
Postal: Department of Finance, Copenhagen Business School, Solbjerg Plads 3, A5, DK-2000 Frederiksberg, Denmark
Phone: +45 3815 3815
Email:
Web page: http://www.cbs.dk/departments/finance/
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Related research

Keywords: Bid-Ask Spread; Earnings Surprises; Asymmetric Information;

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References

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  1. Thomas Ho & Hans Stoll, . "Optimal Dealer Pricing Under Transactions and Return Uncertainty," Rodney L. White Center for Financial Research Working Papers 27-79, Wharton School Rodney L. White Center for Financial Research.
  2. 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 1523-35, September.
  3. Stoll, Hans R, 1989. " Inferring the Components of the Bid-Ask Spread: Theory and Empirical Tests," Journal of Finance, American Finance Association, vol. 44(1), pages 115-34, March.
  4. Affleck-Graves, John & Hegde, Shantaram P & Miller, Robert E, 1994. " Trading Mechanisms and the Components of the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 49(4), pages 1471-88, September.
  5. Foster, F Douglas & Viswanathan, S, 1993. " Variations in Trading Volume, Return Volatility, and Trading Costs: Evidence on Recent Price Formation Models," Journal of Finance, American Finance Association, vol. 48(1), pages 187-211, March.
  6. George, Thomas J & Kaul, Gautam & Nimalendran, M, 1991. "Estimation of the Bid-Ask Spread and Its Components: A New Approach," Review of Financial Studies, Society for Financial Studies, vol. 4(4), pages 623-56.
  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.
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