News-driven return reversals: Liquidity provision ahead of earnings announcements

Eric C. So and Sean Wang

Journal of Financial Economics, 2014, vol. 114, issue 1, 20-35

Abstract: This study documents a six-fold increase in short-term return reversals during earnings announcements relative to non-announcement periods. Following prior research, we use reversals as a proxy for expected returns market makers demand for providing liquidity. Our findings highlight significant time-series variation in the magnitude of short-term return reversals and suggest that market makers demand higher expected returns prior to earnings announcements because of increased inventory risks that stem from holding net positions through the release of anticipated earnings news. Collectively, our findings suggest that uncertainty regarding anticipated information events elicits predictable increases in the compensation demanded for providing liquidity and that these increases significantly affect the dynamics and information content of market prices.

Keywords: Return reversals; Liquidity provision; Inventory risks; Return predictability (search for similar items in EconPapers)
JEL-codes: G10 G11 G12 G14 M41 (search for similar items in EconPapers)
Date: 2014
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Citations: View citations in EconPapers (41)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:114:y:2014:i:1:p:20-35

DOI: 10.1016/j.jfineco.2014.06.009

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