Market Equilibrium and the Intraday Timing of Public Announcements

Accounting

IFA Working Paper

1997

This paper investigates the implications of the intraday timing (during trading or nontrading hours) of public disclosures for market liquidity, price efficiency, and trading volume. The analysis incorporates many institutional details of one of the most prominent classes of financial disclosures, the earnings announcement. It recognizes that a firm's earnings announcement often appears on the Broadtape in two stages. The first release primarily contains the earnings number itself. The second and later release is more comprehensive and detailed. A Two-period model, featuring two types of informed traders, is examined. The first type are short-term investors who privately forecast the firm's yet-to-be disclosed earnings number and trade on their information prior to the earnings release. The second type are long-term investors whose informational advantage comes from their superior ability to analyze the details of the comprehensive earnings release. These investors trade after the comprehensive disclosure has been made. The paper suggests that the intraday timing of the earnings announcement determines whether the (post-announcement) unwinding of short-term investors' prior positions takes place before, or at the same time as, long-term investors trade on their superior assessment of firm value. Differences in market behavior across the two types of the earnings announcement emerge since in the case of a release made at the close short-term investors trade less aggressively than for an announcement made when the exchange is open. Further, for a release made after trading hours, the trading aggressiveness of short-term investors in the pre-announcement period is positively related to the sensitivity of the post-announcement date price to that date order flow, or alternatively, the depth of the market in the post-announcement period. This analysis also provides implications for the effects of trading halts on market volatility in the periods surrounding the public disclosure.

Institute of Finance and Accounting

FIN 250

IFA Working Paper

No