Earnings News and Over-the-Counter Markets
We study how the arrival of firm-specific information during earnings announcements affects liquidity in over-the-counter (OTC) markets. Extensive research has found a decline in equity market liquidity during earnings announcements due to heightened information asymmetry. However, another friction in many markets (e.g., corporate loans and bonds, nonstandard derivatives, and municipal bonds with OTC structures) is […]
Stefan J. Huber is an Assistant Professor of Accounting at Rice University, Chongho Kim is an Assistant Professor of Accounting at Seoul National University, and Edward M. Watts is an Assistant Professor of Accounting at the Yale School of Management. This post is based on their article forthcoming in the Journal of Accounting Research. Related research from the Program on Corporate Governance includes Big Three Power, and Why it Matters (discussed on the Forum here) and Index Funds and the Future of Corporate Governance: Theory, Evidence and Policy (discussed on the Forum here) both by Lucian A. Bebchuk and Scott Hirst; and The Agency Problems of Institutional Investors (discussed on the Forum here) by Lucian A. Bebchuk, Alma Cohen, and Scott Hirst.
We study how the arrival of firm-specific information during earnings announcements affects liquidity in over-the-counter (OTC) markets. Extensive research has found a decline in equity market liquidity during earnings announcements due to heightened information asymmetry. However, another friction in many markets (e.g., corporate loans and bonds, nonstandard derivatives, and municipal bonds with OTC structures) is search and bargaining costs, where investors must first search for a counterparty and then bargain over the terms of trade. To understand how earnings announcements shape liquidity in these securities markets, we must understand how these frictions interact jointly during earnings announcements.
