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The Impact of Intraday Timing of Earnings Announcements on the Bid-Ask Spread and Depth
Abstract
Libby, Mathieu and Robb (2002) investigate, among other things, the impact of intraday timing of earnings announcements on the bid-ask spread and depth for a sample of firms listed on the Toronto Stock Exchange. They document, in a univariate setting, that the spread is relatively wider and the depth lower after announcements declared during non-trading hours than after announcements released during trading hours. This study extends their research by (a) investigating earnings announcements declared by firms traded on the NYSE or AMEX, (b) addressing this issue in a multivariate setting, (c) exploring before-open and after-close announcements separately, and (d) analyzing the impact by half-hour interval. Interestingly, my results indicate, opposite to the findings by Libby et al (2002), that the spread is relatively smaller and the depth higher after overnight announcements than after daytime announcements. These findings are robust to firm-specific factors, cross-listings, differences in the content of daytime and overnight releases, and intraday timing consistency. In addition, this effect occurs after before-open and after after-close announcements, and the analysis by half-hour interval reveals that the impact on the spread (depth) lasts for four (seven) trading half-hours.
... The values of sovereign CDSs were also observed for Germany and Austria. 85 Hotchkiss et al. 2002;Pronk, M., 2006;Libby, Mathieu and Robb, 2002. 117 The research protocol complies with scientific practices regarding comparable subjects, as described in the literature review. ...
Ce corpus de thèse a pour thème général la procyclicité et l’influence de la notation sur les marchés européens entre2001 et 2012 et est composé de trois travaux de recherche distincts. L’existence d’un changement de régime identifié en janvier 2008 sur les marchés européens permet de tester l’occurrence d’une modification des comportements vis à vis de la notation, en analyser les raisons et en mesurer les conséquences. Le premier groupe de résultats provientd’une étude d’événement menée à partir des modifications de la notation (dégradation ou augmentation de la note), et portant sur la valeur des actions dans les différents marchés européens. Le changement de régime a des conséquences significatives : après 2008, il apparaît que changements de notes ont bien un effet procyclique sur les cours ; cet effet est analysé en fonction des caractéristiques spécifiques des structures notées. Le deuxième groupe de résultat est issu de l’étude d’une double dégradation importante : la perte du AAA par la France pendant l’année 2012, d’abord par S&P puis par Moody’s. L’impact est mesuré par différents outils portant cette fois sur la valeur des dettes émises par l’état français. Les résultats sont très significatifs : l’information fournie par le changement de note est bien un facteur fondamental de la valorisation de la dette souveraine par les marchés, entraînant un réel effet de contagion d’un pays à l’autre. Néanmoins, il apparaît bien que si le changement de note est un événement significatif, la réalité qu’il représente était intégrée par les marchés, le changement de note constituant une sorte de « stabilisateur de marchés ». Le troisième groupe de résultats concerne l’interrelation entre les modifications des consensus d’analystes financiers et celle des notations. A nouveau, une évolution très sensible est mise en évidence après le changement de régime de2008. Dans les circonstances de crise, la dégradation est amplifiée par le relai des consensus d’analystes, il est possible de parler d’un véritable Cliff effect (effet de falaise), marquant le caractère moutonnier (herding behavior) des marchés en période de forte tension, donc privilégiant les logiques d’aversion au risque.
... In the theoretical literature there is not a dominant view on whether earnings announcements represent a substitute (as in Kim and Verrecchia (1991), Demsky and Feltham (1994), McNichols and Truman (1994)) or a complement (as in Kim and Verrecchia (1994) and Livne (2000)) of private information: in the former case asymmetric information and adverse selection costs are expected to decrease after the announcements; in the latter case asymmetric information and adverse selection costs are expected to increase after the announcements. Most of empirical studies (for example Lee et al. (1993), Krinsky and Lee (1996), Libby et al. (2002) and Pronk (2006)) find that liquidity decreases in the period around earnings announcements. Fewer works (for example Morse and Ushman (1983), Venkatesh and Chiang (1986) and Skinner (1991)) document that earnings announcements do not significantly affect liquidity. ...
This paper proposes to use order aggressiveness as a metric to evaluate the usefulness of accounting information. I test, through an analysis of order aggressiveness, whether earnings announcements of firms listed in the Italian Stock Exchange limit order book have information content. I estimate an ordered probit relating order aggressiveness to unexpected earnings and to three market determinants of aggressiveness. I conjecture that unexpected earnings affect in opposite directions order submission strategies of traders who predict an underreaction and traders who predict an overreaction to the news. Consistently with this, I find that order aggressiveness is increasing in the absolute value of unexpected earnings. The results provide evidence on the extent to which the information contained in earnings is used by traders.
... Several studies detect an increase in information asymmetries around earnings announcements driven by the presence of informed agents that either have more information or have superior abilities to process it - Venkatesh andChiang (1986), Lee et al. (1993), Brooks (1994), Krinsky and Lee (1996), Yohn (1998), Gajewski (1999) and Affleck-Graves et al. (2002) and Pronk (2006)-. On the contrary, other studies such as Acker et al. (2002) and Otogawa (2003) detect a decrease in information asymmetries after the announcement driven by the reduction of uncertainty when the earnings are announced. ...
The goal of this paper is to analyze the impact of annual earnings announcements on the market through the order flow data in addition to the usual transaction data. In this respect, examining order flow data can potentially reveal valuable information that is not available from transaction data. In fact, the data allow us to test hypotheses about asymmetric information and investor behavior and to test if the behavior varies with investor sophistication. In addition, the paper tries to identify the determinants of the impact on a firm's value using assumptions about investor behavior.
... Several studies detect an increase in information asymmetries around earnings announcements driven by the presence of informed agents that either have more information or have superior abilities to process it - Venkatesh andChiang (1986), Lee et al. (1993), Brooks (1994), Krinsky and Lee (1996), Yohn (1998), Gajewski (1999) and Affleck-Graves et al. (2002) and Pronk (2006)-. On the contrary, other studies such as Acker et al. (2002) and Otogawa (2003) detect a decrease in information asymmetries after the announcement driven by the reduction of uncertainty when the earnings are announced. ...
Earnings announcements are anticipated events with significant price impacts. This fact can motivate informed traders to trade on private information and liquidity providers to reduce liquidity in order to be careful about insider trading. In this paper, we examine the effect of earnings announcements on information asymmetry. Specifically, we investigate whether liquidity suppliers value the possibility of trading with informed agents and whether market behaviour reflects this. To achieve this objective, we take into account the sign of the surprise, the quarter of the announcement, the quantity of previous information and the quality of the information released. One of the main results of the paper is the support of market efficiency. This result is important nowadays since this hypothesis is being questioned after the irruption of the financial crisis.
... Receiver approaches, by contrast, measure disclosure based on the professional judgement of financial analysts. A well-known example is the disclosure ranking published by the Association for Investment and Management Research (AIMR; see Lang and Lundholm, 1993; Welker, 1995; Lundholm and Myers, 2002; Gelb and Greenstein, 2004; Pronk, 2006). The most common type of approach, however, is observer approaches. ...
Empirical research on voluntary disclosure lacks an appropriate measurement technique for quantifying the intensity of firm’s disclosure. In this paper I introduce AIMD, a computerised technique for measuring disclosure using artificial intelligence, which derives disclosure proxies from English-language annual reports for ten different information dimensions without human involvement. Criterion validity tests indicate that, controlling for a robust set of covariates and multiple statistical techniques, AIMD is negatively associated with information asymmetry as proxied by spreads and PIN. Furthermore AIMD has construct validity when compared to the AIMR disclosure rating, Standard & Poor’s Transparency and Disclosure Rating, several proprietary manual disclosure scorings and companies’ own assessment of their level of disclosure as indicated by a survey. I also demonstrate the applicability of AIMD as a cost-effective technique for measuring disclosure using a sample of 127,895 firm-year observations of companies regulated by the SEC.
We study after-hours trading (AHT), price contributions, and price discovery following quarterly earnings announcements released outside of the normal trading hours. For Standard & Poor’s (S&P) 500 index stocks from 2004–2008, AHT is heightened on announcement days. A significant portion of the price change and price discovery occurs immediately after the earnings releases. Prices in AHT show a large degree of informational efficiency, further demonstrating the importance of price discovery in AHT. We also provide evidence suggesting that firms prefer after-hours earnings announcements, as trades are mainly from informed traders, and those trades are relied upon to convey information to the general public.
Recent empirical evidence on traders'order submission strategies in elec-tronic limit order markets (LOB) shows the growing use of hidden orders. This paper provides a theory of the optimal order submission strategies in an LOB, where traders can choose among limit, market and hidden orders. The dynamic model we propose allows traders to take the simultaneous three-dimensional strategic choice of price, quantity and exposure. Traders use hidden orders both to compete for the provision of liquidity and to avoid picking-o¤ risk. The use of hidden orders increases with order size and rela-tive depth on the opposite side of the market, while it decreases with time-to-shock. Hidden orders increase market depth but could reduce competition in the supply of liquidity, thus making the inside spread wider; hence they could be bene…cial to institutional investors, but detrimental to retailers. Regulators should also be aware that hidden orders have stabilizing e¤ects when the market is under stress.
for their insights and valuable suggestions. All remaining errors are our own.
Beginning with Patell and Wolfson (1982), several papers have documented that earnings announcements made after the market closes and/or on Fridays tend to contain worse earnings news than those made at other times. One hypothesis is that opportunistic managers release earnings at these times of decreased media attention to "hide" their bad news and reduce the associated market penalty. Using firm-level tests that focus on only those firms that switch their disclosure timing (rather than consistently report at the same time), we find no evidence that managers opportunistically report worse news after the market closes or on Fridays. We then explore other determinants of the timing decision, including the more benign hypothesis that managers with worse earnings news release earnings after the market closes to more broadly disseminate the information. Consistent with desiring more time for the market to assimilate the announcement, we find some evidence that more complex firms tend to announce earnings after the market closes. We also find that these announcements are associated with greater abnormal volume, possibly indicating a successful dissemination strategy. We also find that the corporate headquarters location, the size of the firm, the number of analysts covering the firm, and industry membership are all significant explanatory variables for the timing decision. Overall, our findings are consistent with efficient capital markets that are effective at monitoring new information, regardless of the time of the announcement.
Motivated by the availability of high-frequency data on trading activity, this paper proposes the use of order aggressiveness as a metric to evaluate the usefulness of accounting information. I test, through an analysis of order aggressiveness, whether earnings announcements of firms listed on the Italian Stock Exchange limit order book have information content. I estimate an ordered probit relating order aggressiveness to unexpected earnings and to three market determinants of aggressiveness. Consistent with the theory on the choice between limit and market orders, I find that order aggressiveness increases with the absolute value of unexpected earnings. The results provide evidence on the extent to which the information contained in earnings is used by traders.
Using Spanish data, this paper examines, for the first time, the differences in the intraday response of an order-driven market
to earnings announcements made during trading and non-trading hours. We show that the speed of reaction depends on timing
of the announcement: for overnight (daytime) announcements, the improvement in liquidity is (not) immediate. This finding
could explain why Spanish firms prefer to release the bad (good) earnings announcement in trading (non-trading) hours. This
strategic timing differs from the traditional disclosure policy in American markets, suggesting that different microstructures
may react differently to news releases and, consequently, drive the strategic timing of corporate disclosures.
An important element of a firm’s disclosure strategy is the timing of its mandatory public announcements. In this article,
two aspects of disclosure timing are examined. The first is the intraday timing of earnings announcements. It is demonstrated
here that, under reasonable conditions, market prices reflect better the valuation implications of an earnings announcement
when it is made during trading hours rather than after the market has closed. This implies that managers should prefer to
release earnings with positive (negative) implications for firm value during (after) trading hours. The second issue examined
is the sequencing of multiple corporate disclosures. It is shown that if the announcements have positive (negative) implications
for firm value, managers should prefer to make them separately (simultaneously), as market prices better reflect the valuation
implications of multiple announcements when they are made at different times.
For a sample of NYSE firms, we show that wide spreads are accompanied by low depths, and that spreads widen and depths fall
in response to bigger volume. Spreads widen and depths fall in anticipation of earnings announcements; these effects are more
pronounced for announcements with larger subsequent price changes. Spreads are also wider following earnings announcements,
but this effect dissipates quickly after controlling for volume. Collectively, our results suggest liquidity providers are
sensitive to changes in information asymmetry risk and use both spreads and depths to actively manage this risk.
We examine the market response to quarterly earnings announcements made during trading and nontrading hours on the NYSE and the NASDAQ. For nontrading hours announcements, the opening trade on the NYSE impounds most of the price response, whereas for trading hours announcements, the response is spread evenly over the first several post-announcement trades. In contrast, the first post-announcement trade on the NASDAQ impounds most of the price response regardless of the announcement time. These results suggest that the different trading environments on the two exchanges (e.g., specialist versus dealer market, call auction versus continuous trading, etc.) may differ in their ability to impound information.
This paper examines the effect of earnings announcements on information asymmetry as perceived by specialists. We use changes in quoted bid-ask spreads and depths (relative to the average value in the non-announcement period) as proxies for changes in information asymmetry in the market. To our knowledge, we are the first to employ a model which captures the simultaneous nature of the specialists' choice of spreads and depths in reaction to earnings news. We provide evidence that spreads are wider and depths are smaller prior to the release of earnings announcements. We also find that changes to depths are greater for announcements of quarterly earnings than for announcements of annual earnings and changes to spreads persist longer into the post-announcement period when announcements are made outside trading hours. These changes to spreads and depths persist when earnings announcements are made after trading hours.
This paper investigates inter-temporal relations in market liquidity and price efficiency in a setting that is more descriptive of trading patterns around public announcements than those typically analyzed in the existing literature. The model incorporates both strategic investors who behave as short-term, profit-taking traders, and traders who invest in the security over a long-term horizon. It is shown that an anticipated increase in market liquidity in the announcement period will lead short-term investors to trade more aggressively in the pre-announcement period. This results in improved price efficiency and, in some cases, increased market liquidity in the pre-announcement period. However, a higher propensity to behave as a profit-taker in the announcement period leads to less efficient prices in the pre-announcement period.
The presence of traders with superior information leads to a positive bid-ask spread even when the specialist is risk-neutral and makes zero expected profits. The resulting transaction prices convey information, and the expectation of the average spread squared times volume is bounded by a number that is independent of insider activity. The serial correlation of transaction price differences is a function of the proportion of the spread due to adverse selection. A bid-ask spread implies a divergence between observed returns and realizable returns. Observed returns are approximately realizable returns plus what the uninformed anticipate losing to the insiders.
This paper suggests that earnings announcements provide information that allows certain traders to make judgements about a firm's performance that are superior to the judgements of other traders. As a result, there may be more information asymmetry at the time of an announcement than in nonannouncement periods. More information asymmetry implies that bid–ask spreads increase, suggesting that market liquidity decreases at the time of an earnings announcement. Furthermore, informed opinions resulting from public disclosure may lead to an increase in trading volume, despite the reduction in liquidity that accompanies announcements.
I. Introduction, 79. — II. Inventory management and supply of liquidity, 80. —III. Empirical findings, 87. — IV. Conclusions,
93.
This article develops a model of spread and depth setting under asymmetric information where the equilibrium depth is proportionally
more sensitive than the spread to changes in the degree of information asymmetry. The analysis uses a one-period model in
which a risk-neutral, monopolistic market maker faces a price-sensitive liquidity trader and a better informed trader who
is alternatively risk neutral and risk averse. The equilibrium depth can take values ranging from 0 to infinity, depending
on the information asymmetry, the asset volatility, and the strength of the liquidity demand, while the spread remains positive
and finite.
There are two distinct components to a specialist's price schedule, prices and debths. This paper presents a model of a specialist's problem of choosing prices and debths jointly in order to maximize profits.
This study investigates the behavior of the components of the bid-ask spread around earnings announcements. The authors find that the adverse selection cost component significantly increases surrounding the announcements, while the inventory holding and order processing components significantly decline during the same periods. Their results suggest that the directional change in the total bid-ask spread depends on the relative magnitudes of the changes in these three components. Specifically, the decreases in inventory holding costs and order processing costs imply that earnings announcements may have an insignificant impact on the total bid-ask spread, even when they result in increased information asymmetry. Copyright 1996 by American Finance Association.
This paper evaluates alternative methods for classifying individual trades as market buy or market sell orders using intraday trade and quote data. The authors document two potential problems with quote-based methods of trade classification: quotes may be recorded ahead of trades that triggered them, and trades inside the spread are not readily classifiable. These problems are analyzed in the context of the interaction between exchange floor agents. The authors then propose and test relatively simple procedures for improving trade classifications. Copyright 1991 by American Finance Association.
The paper examines the optimal behavior of a single dealer who is faced with a stochastic demand to trade (modeled by a continuous time Poisson jump process) and facing return risk on his stock and on the rest of his portfolio (modeled by diffusion processes). Using stochastic dynamic programming, we derive the optimal bid and ask prices that maximize the dealer's expected utility of terminal wealth as a function of the state in which he finds himself. The relationship of the bid and ask prices to inventory of the dealer, instantaneous variance of return, stochastic arrival of transactions and other variables is examined.
An individual who chooses to serve as a market‐maker is assumed to optimize his position by setting a bid‐ask spread which maximizes the difference between expected revenues received from liquidity‐motivated traders and expected losses to information‐motivated traders. By characterizing the cost of supplying quotes, as writing a put and a call option to an information‐motivated trader, it is shown that the bid‐ask spread is a positive function of the price level and return variance, a negative function of measures of market activity, depth, and continuity, and negatively correlated with the degree of competition. Thus, the theory of information effects on the bid‐ask spread proposed in this paper is consistent with the empirical literature.
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