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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Publisher Info
Paper provided by Copenhagen Business School, Department of Finance in its series Working Papers with number
2000-6.
Find related papers by JEL classification: G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
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