Earnings Announcements and the Components of the Bid-Ask Spread

Authors

  • ITZHAK KRINSKY,

  • JASON LEE

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    • Krinsky is from the Michael G. DeGroote School of Business, McMaster University, and the Stern School of Business, New York University; and Lee is from the Michael G. DeGroote School of Business, McMaster University and The Hong Kong Polytechnic University. We would like to thank René Stulz (the editor) and the anonymous referee for their helpful comments. Financial support from the Social Sciences and Humanities Research Council of Canada and the National Science and Engineering Research Council of Canada under grant number OGP0042195 is gratefully acknowledged.


ABSTRACT

This study investigates the behavior of the components of the bid-ask spread around earnings announcements. We 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. Our 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.

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