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Daily closing inside spreads and trading volumes around earnings announcements

  • Daniella Acker
  • Mathew Stalker
  • Ian Tonks

This paper examines the determinants of inside spreads and their behaviour around corporate earning announcement dates, for a sample of UK firms over the period 1986-94. The paper finds that closing daily inside spreads are affected by order processing costs (proxied by trading volumes), inventory control costs (trading volumes and return variability) and asymmetric information (unusually high trading volumes). Inside spreads start to narrow 15 days before an earnings announcement, and narrow further by the end of the announcement day. We also identify a puzzling phenomenon. There is only a ‘sluggish’ recovery of spreads after the announcement: inside spreads continue to remain at relatively narrow levels, and take up to 90 days to recover to their pre-announcement width.

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File URL: http://eprints.lse.ac.uk/24908/
File Function: Open access version.
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Paper provided by London School of Economics and Political Science, LSE Library in its series LSE Research Online Documents on Economics with number 24908.

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Length: 37 pages
Date of creation: Feb 2002
Date of revision:
Handle: RePEc:ehl:lserod:24908
Contact details of provider: Postal: LSE Library Portugal Street London, WC2A 2HD, U.K.
Phone: +44 (020) 7405 7686
Web page: http://www.lse.ac.uk/

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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. Lee, Charles M C & Mucklow, Belinda & Ready, Mark J, 1993. "Spreads, Depths, and the Impact of Earnings Information: An Intraday Analysis," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 345-74.
  3. I. Krinsky & J. Lee, 1996. "Earning Announcements and the Components of the Bid-Ask Aspread," Quantitative Studies in Economics and Population Research Reports 313, McMaster University.
  4. Thomas Ho & Hans Stoll, . "On Dealer Markets Under Competition," Rodney L. White Center for Financial Research Working Papers 01-80, Wharton School Rodney L. White Center for Financial Research.
  5. 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.
  6. Garbade, Kenneth D & Silber, William L, 1979. "Structural Organization of Secondary Markets: Clearing Frequency, Dealer Activity and Liquidity Risk," Journal of Finance, American Finance Association, vol. 34(3), pages 577-93, June.
  7. Copeland, Thomas E & Galai, Dan, 1983. " Information Effects on the Bid-Ask Spread," Journal of Finance, American Finance Association, vol. 38(5), pages 1457-69, 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 1523-35, September.
  9. 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.
  10. Kyle, Albert S, 1985. "Continuous Auctions and Insider Trading," Econometrica, Econometric Society, vol. 53(6), pages 1315-35, November.
  11. Karpoff, Jonathan M, 1986. " A Theory of Trading Volume," Journal of Finance, American Finance Association, vol. 41(5), pages 1069-87, December.
  12. John Board & Charles Sutcliffe, 1996. "Trade Transparency and the London Stock Exchange," European Financial Management, European Financial Management Association, vol. 2(3), pages 355-365.
  13. Hasbrouck, Joel, 1991. " Measuring the Information Content of Stock Trades," Journal of Finance, American Finance Association, vol. 46(1), pages 179-207, March.
  14. Acker, Daniella, 1999. " Stock Return Volatility and Dividend Announcements," Review of Quantitative Finance and Accounting, Springer, vol. 12(3), pages 221-42, May.
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