Intraday bid-ask spreads surrounding earnings announcements and information asymmetry
This thesis empirically analyzes the spread between the buying price (ask) and the selling price (bid) around the time of earnings announcements. The spread is found to increase after earnings announcements. The analysis controls for the quarter of announcement and simultaneous announcement of dividends. Tests suggest that the behavior of spreads does not depend on differences in time of announcement, deviation from the expected date of announcement, price, market value, trading halt, or institutional holdings. These empirical results suggest that information asymmetry increases significantly after an earnings announcement. I examine two models that predict an increase in information asymmetry after earnings announcements, but neither model alone provides a satisfactory explanation of my findings. The first model predicts a higher increase in spreads after positive earnings surprise if managers of firms manipulate earnings announcements to influence stock prices. The second model assumes costs for short selling stocks and predicts a higher increase in spreads after negative earnings surprise; among the firms with negative earnings surprise, the model predicts a higher increase in spreads for firms without traded options. I find that the increase in spreads does not depend on the sign of the earnings surprise. In addition, for the firms with negative earnings surprise, the increase in spreads does not depend on the existence of options. I also examine the hypothesis that spreads may be higher following earnings announcements because monopolistic dealers want to profit from the expected high volume of trading following earnings announcements due to, for example, portfolio rebalancing. I find that increase in spreads is not associated with higher abnormal volume.
|Year of publication:||
|Authors:||Patel, Sandeep Anubhai|
|Type of publication:||Other|
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