Market reaction to earnings news: A unified test of information risk and transaction costs

Qi Zhang, Charlie X. Cai and Kevin Keasey

Journal of Accounting and Economics, 2013, vol. 56, issue 2, 251-266

Abstract: We examine how information risk and transaction costs influence the initial and subsequent market reaction to earnings news. We find that the initial market reaction is higher per unit of earnings surprise for higher information risk firms (information content effect). Furthermore, it is information risk that induces transaction costs that limit the initial market reaction and lead to higher subsequent drift (transaction costs effect). Information risk does not have an effect on drift beyond that achieved through transaction costs. Our findings highlight the importance of understanding the linkage between information risk and transaction costs in price discovery around public disclosure.

Keywords: Information risk; Transaction costs; Price discovery; Earnings announcements (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jaecon:v:56:y:2013:i:2:p:251-266

DOI: 10.1016/j.jacceco.2013.08.002

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