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Market reaction to earnings news: A unified test of information risk and transaction costs

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  • Zhang, Qi
  • Cai, Charlie X.
  • Keasey, Kevin

Abstract

We examine how information risk and transaction costs influence the initial and subsequent market reaction to earnings news. We find that the initial market reaction is higher per unit of earnings surprise for higher information risk firms (information content effect). Furthermore, it is information risk that induces transaction costs that limit the initial market reaction and lead to higher subsequent drift (transaction costs effect). Information risk does not have an effect on drift beyond that achieved through transaction costs. Our findings highlight the importance of understanding the linkage between information risk and transaction costs in price discovery around public disclosure.

Suggested Citation

  • Zhang, Qi & Cai, Charlie X. & Keasey, Kevin, 2013. "Market reaction to earnings news: A unified test of information risk and transaction costs," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 251-266.
  • Handle: RePEc:eee:jaecon:v:56:y:2013:i:2:p:251-266 DOI: 10.1016/j.jacceco.2013.08.002
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    1. repec:eee:pacfin:v:44:y:2017:i:c:p:150-159 is not listed on IDEAS
    2. repec:eee:corfin:v:44:y:2017:i:c:p:167-192 is not listed on IDEAS
    3. Anagnostopoulou, Seraina C. & Tsekrekos, Andrianos E., 2015. "Accounting quality, information risk and implied volatility around earnings announcements," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 34(C), pages 188-207.

    More about this item

    Keywords

    Information risk; Transaction costs; Price discovery; Earnings announcements;

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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