The Effect of Information Asymmetry on Bid-Ask Spreads Around Earnings Announcements by NASDAQ Firms

Samuel Tung
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Samuel Tung: School of Business, The Hong Kong Baptist University, Kowloon, Hong Kong, China

Review of Pacific Basin Financial Markets and Policies (RPBFMP), 2000, vol. 03, issue 03, 331-346

Abstract: This paper empirically tests Kim and Verrecchia's (1994, hereafter KV) theory that bid-ask spreads may increase around earnings announcements when information asymmetry increases between the informed traders and the less informed market-makers. Despite certain limitations, prior research has used analysts' earnings forecasts as a proxy for information asymmetry. I substitute the percentage of common stocks held by institutional investors as a more precise proxy for information asymmetry. Consistent with KV's proposition, I find (1) that bid-ask spreads increase at the time of earnings announcements, and (2) that bid-ask reactions to earnings announcements are significantly positively related to information asymmetry even after controlling for the effects of other cross-sectional determinants of spreads.

Keywords: institutional ownership; market reaction; market liquidity; cost of capital (search for similar items in EconPapers)
JEL-codes: G1 G2 G3 (search for similar items in EconPapers)
Date: 2000
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Citations: View citations in EconPapers (9)

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DOI: 10.1142/S0219091500000157

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