Are Changes in Public and Private Information Precision Related to Changes in Market Liquidity Around Earnings Announcements?

We investigate the relations between changes in the precisions of public and private information and changes in market liquidity around earnings announcements. Increases in the precision of public information reduce information asymmetry, whereas increases in the precision of private information increase information asymmetry. Copeland and Galai (1983), Glosten and Milgrom (1985) and Kyle (1985) demonstrate that market liquidity decreases with increases in information asymmetry. Consequently, we hypothesize that changes in public information precision are positively related to changes in market liquidity and changes in private information precision are negatively related to changes in market liquidity. We employ percentage spreads and quoted depths to measure market liquidity and the measures proposed by Barron, Kim, Lim and Stevens (1998) to measure public and private information precision. Consistent with our hypotheses, we find that changes in the bid-ask spread are negatively related to changes in the precision of public information and positively related to changes in private information precision. Also consistent with our hypothesis, we find that changes in depth are negatively related to changes in the precision of private information. However, we do not find support for our hypothesis that changes in depth are positively related to changes in public information precision