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

Author

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  • 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.

Suggested Citation

  • Voetmann, Torben, 2001. "Changes in The Bid-Ask Components Around Earnings Announcements: Evidence from the Copenhagen Stock Exchange," Working Papers 2000-6, Copenhagen Business School, Department of Finance.
  • Handle: RePEc:hhs:cbsfin:2000_006
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    File URL: http://openarchive.cbs.dk/cbsweb/handle/10398/7178
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    References listed on IDEAS

    as
    1. 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 1471-1488, September.
    2. 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.
    3. 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.
    4. 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 1523-1535, September.
    5. 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 115-134, March.
    6. Ho, Thomas & Stoll, Hans R., 1981. "Optimal dealer pricing under transactions and return uncertainty," Journal of Financial Economics, Elsevier, vol. 9(1), pages 47-73, March.
    7. 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 623-656.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Bid-Ask Spread; Earnings Surprises; Asymmetric Information;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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