The authors are respectively from McMaster University, University of Houston and Otterbein College. They thank Mary Geddie, Robert Mathieu and seminar participants at University of Houston for their valuable comments. They gratefully acknowledge the contribution of Thompson Financial for providing forecast data, available through the Institutional Brokers Estimate System (I/B/E/S). These data have been provided as part of a broad academic program to encourage earnings expectations research. Kanagaretnam and Lobo thank the Canadian Academic Accounting Association/CGA Canada and the Social Sciences and Humanities Research Council of Canada (SSHRC) for their financial support.
Relationship Between Analyst Forecast Properties and Equity Bid-Ask Spreads and Depths Around Quarterly Earnings Announcements
Article first published online: 16 NOV 2005
Journal of Business Finance & Accounting
Volume 32, Issue 9-10, pages 1773–1799, November 2005
How to Cite
Kanagaretnam, K., Lobo, G. J. and Whalen, D. J. (2005), Relationship Between Analyst Forecast Properties and Equity Bid-Ask Spreads and Depths Around Quarterly Earnings Announcements. Journal of Business Finance & Accounting, 32: 1773–1799. doi: 10.1111/j.0306-686X.2005.00647.x
- Issue published online: 16 NOV 2005
- Article first published online: 16 NOV 2005
- (Paper received August 2004, revised and accepted January 2005)
- information asymmetry;
- market liquidity;
- analyst forecast properties;
- earnings announcements
Abstract: We study the relationships between three variables which proxy for the ex-ante level of information asymmetry – forecast dispersion, forecast revision volatility, and the level of analyst coverage, and equity bid-ask spread and depth changes around quarterly earnings releases. Kim and Verrecchia (1994) suggest that earnings releases increase the level of information asymmetry and lower the level of liquidity in the security market. Using both an OLS regression framework and a simultaneous equations model, we examine whether equity bid-ask spreads increase and depths decrease as the level of information asymmetry increases. Our results indicate that spreads are higher (relative to a non-event period) around earnings announcements when information asymmetry is more pronounced; however, depths are lower only on the day following the announcement when there is greater information asymmetry. Relative spreads have a significant positive relation with both forecast dispersion and revision volatility and a significant negative relation with analyst coverage. Relative depths have a significant negative relation with forecast dispersion and a significant positive relation with analyst coverage. Our findings indicate that the equity specialist adjusts both spreads and depths when confronting informed traders around earnings releases and that these adjustments are more pronounced when the level of information asymmetry is greater.