Relationship between Analyst Forecast Properties and Equity Bid-Ask Spreads and Depths Around Quarterly Earnings Announcements
Journal of Business Finance & Accounting, Volume 32, Issue 9-10, 2005
32 Pages Posted: 5 Aug 2004 Last revised: 27 Feb 2017
Abstract
We study the relationships between three variables which proxy for the ex-ante level of information asymmetry - forecast dispersion, forecast revision volatility, and the level of analyst coverage, and equity bid-ask spread and depth changes around quarterly earnings releases. Kim and Verrecchia, 1994 suggest that earnings releases increase the level of information asymmetry and lower the level of liquidity in the security market. Using both an OLS regression framework and a simultaneous equations model, we examine whether equity bid-ask spreads increase and depths decrease as the level of information asymmetry increases. Our results indicate that spreads are higher (relative to a non-event period) around earnings announcements when information asymmetry is more pronounced; however, depths are lower only on the day following the announcement when there is greater information asymmetry. Relative spreads have a significant positive relation with both forecast dispersion and revision volatility and a significant negative relation with analyst coverage. Relative depths have a significant negative relation with forecast dispersion and a significant positive relation with analyst coverage. Our findings indicate that the equity specialist adjusts both spreads and depths when confronting informed traders around earnings releases and that these adjustments are more pronounced when the level of information asymmetry is greater.
Keywords: Bid-ask spread, depth, information asymmetry, analyst forecast properties, analyst forecast dispersion, forecast revision volatility
JEL Classification: G10, G12, G14, M41
Suggested Citation: Suggested Citation
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