Does high-frequency trading reduce market underreaction to earnings news?

Yun Ke and Yanan Zhang

Finance Research Letters, 2020, vol. 34, issue C

Abstract: This paper examines the impact of high-frequency trading (HFT) on market underreaction to earnings news as measured by the magnitude of post-earnings announcement drift (PEAD). Using a dataset provided by NASDAQ, we are able to better identify HFT activities and reduce measurement errors. We find that the magnitude of PEAD decreases with the increase of HFT. More importantly, we show that this effect is due to HFT's liquidity supplying role (i.e., passive HFT fulfilling market orders), not liquidity demanding role (i.e., HFT initiating market orders). The results also reveal that the effect is more pronounced when earnings surprises are extreme and large. Taken together, HFT seems to help mitigate market inefficiency by providing liquidity.

Keywords: High-frequency trading (HFT); Market underreaction; Earnings news; Post-earnings announcement drift (PEAD) (search for similar items in EconPapers)
JEL-codes: G14 G30 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:34:y:2020:i:c:s154461231930354x

DOI: 10.1016/j.frl.2019.07.012

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