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Earnings announcements and attention constraints: The role of market design

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  • Chakrabarty, Bidisha
  • Moulton, Pamela C.

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.

Suggested Citation

  • Chakrabarty, Bidisha & Moulton, Pamela C., 2012. "Earnings announcements and attention constraints: The role of market design," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 612-634.
  • Handle: RePEc:eee:jaecon:v:53:y:2012:i:3:p:612-634
    DOI: 10.1016/j.jacceco.2012.01.001
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    Cited by:

    1. Paolo Pasquariello & Clara Vega, 2015. "Strategic Cross-Trading in the U.S. Stock Market," Review of Finance, European Finance Association, vol. 19(1), pages 229-282.
    2. repec:oup:rfinst:v:30:y:2017:i:4:p:1053-1094. is not listed on IDEAS
    3. Eunju Lee, 2016. "Short selling and market mispricing," Review of Quantitative Finance and Accounting, Springer, vol. 47(3), pages 797-833, October.
    4. Thierry Foucault & Roman Kozhan & Wing Wah Tham, 2017. "Toxic Arbitrage," Review of Financial Studies, Society for Financial Studies, vol. 30(4), pages 1053-1094.
    5. Menkveld, Albert J., 2013. "High frequency trading and the new market makers," Journal of Financial Markets, Elsevier, vol. 16(4), pages 712-740.
    6. Bin Miao & Siew Hong Teoh & Zinan Zhu, 2016. "Limited attention, statement of cash flow disclosure, and the valuation of accruals," Review of Accounting Studies, Springer, vol. 21(2), pages 473-515, June.
    7. Gonzalez-Perez, Maria T., 2015. "Model-free volatility indexes in the financial literature: A review," International Review of Economics & Finance, Elsevier, vol. 40(C), pages 141-159.
    8. Michaely, Roni & Rubin, Amir & Vedrashko, Alexander, 2016. "Are Friday announcements special? Overcoming selection bias," Journal of Financial Economics, Elsevier, vol. 122(1), pages 65-85.
    9. Abad, David & Pascual, Roberto, 2015. "The friction-free weighted price contribution," International Review of Economics & Finance, Elsevier, vol. 37(C), pages 226-239.

    More about this item

    Keywords

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

    JEL classification:

    • G02 - Financial Economics - - General - - - Behavioral Finance: Underlying Principles
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • M40 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - General
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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