Market reaction to anticipated announcements

doi:10.1016/0304-405X(91)90033-G

Journal of Financial Economics

Volume 30, Issue 2, December 1991, Pages 273-309

https://doi.org/10.1016/0304-405X(91)90033-G Get rights and content

Abstract

In this paper we analyze how anticipating a forthcoming public announcement affects the market reaction to the announcement by altering investors' incentives to acquire private information. Specifically, we study price change, volume, and information asymmetry at the time of the announcement. We also investigate how information acquisition, information asymmetry, price, and volume are influenced by the quality of prior knowledge, the marginal cost of gathering information, the degree of risk tolerance, and noise. Finally, we compare market reactions to anticipated announcements of known precision with the response to announcements that are either unanticipated or of uncertain quality.

References (16)

Douglas W. Diamond et al.
Information aggregation in a noisy rational expectations economy
Journal of Financial Economics
(1981)
Larry R. Glosten et al.
Bid, ask and transaction prices in a specialist market with heterogeneously informed traders
Journal of Financial Economics
(1985)
Josef Lakonishok et al.
Tax-induced trading around ex-dividend days
Journal of Financial Economics
(1986)
Paul Milgrom et al.
Information, trade and common knowledge
Journal of Economic Theory
(1982)
Gordon Richardson et al.
A test of dividend irrelevance using volume reactions to a change in dividend policy
Journal of Financial Economics
(1986)
Anat R. Admati et al.
A theory of intraday patterns: Volume and price variability
Review of Financial Studies
(1988)
Thomas E. Copeland
A model of asset trading under the assumption of sequential information arrival
Journal of Finance
(1976)
Bruce D. Grundy et al.
Trade and the revelation of information through prices and direct disclosure
Review of Financial Studies
(1989)

There are more references available in the full text version of this article.

Cited by (371)

Investing while lending: Do index funds improve managerial information disclosure?
2024, International Review of Financial Analysis
Securities lending activities have become pervasive among index funds in recent decades, yet its impact on information disclosure remains unclear. In this paper, we jointly investigate the information disclosure impact of both investing and lending activities of index funds, using a sample of the U.S. firms for 2002–2017. On the one hand, we document that securities lending deteriorates the information environment of public firms. On the other, index fund holdings are associated with greater information transparency and less bad news hoarding by firm managers, after controlling for the opposing effects from securities lending. This finding survives a battery of robustness tests and is more pronounced in a small sample using the Russell 1000/2000 index reconstitution as a source of plausibly exogenous variation in index fund holdings. We also document a negative association between index ownership and abnormal trading activities around stock price crash weeks. Our findings support the view that regardless of their pervasive securities lending engagement and passive investing strategies, index funds impose an overall favourable impact on information environment of public firms.
Information acquisition and processing skills of institutions and retail investors around information shocks
2024, Journal of Empirical Finance
Using audit trail data from the Taiwan Stock Exchange, this paper compares the trading skill of institutions and individuals around information shocks. We find suggestive evidence that institutions possess information acquisition and processing advantages over individuals. Specifically, net buying done by institutions (individuals) prior to and during jumps positively (negatively) predicts future intraday returns. This predictive relation is strongest among stocks with high limits to arbitrage and a limited information environment. Moreover, domestic institutions generate higher trading profits than foreign institutions. Unlike domestic institutions, the information acquisition and processing advantages of foreign institutions prevail across different sources of price jumps, such as prescheduled events and macroeconomic news. Prescheduled events and news lessen the information disadvantages for individuals.
Informed trading and cryptocurrencies. New evidence using tick-by-tick data
2024, Finance Research Letters
Do trade size preferences exist in cryptocurrencies? Using high-frequency tick-by-tick data of cryptocurrencies, we examine what trade sizes contribute to daily cumulative price changes, viz. small, medium, and large. We employ robust estimations and document the presence of informed trading in the cryptocurrency asset class, and this is specifically translated via medium and small trades. We provide evidence to support the presence of stealth trading in cryptocurrencies. Our results contradict the prevailing view that informed trades in the cryptocurrency market occur via large trades.
Privileged information access, analyst consensus building, and stock return volatility: Evidence from the JOBS Act
2024, Advances in Accounting
This study examines whether allowing select analysts private access to management before an IPO affects analyst consensus building and subsequently post-IPO stock return volatility. The 2012 Jumpstart Our Business Startups (JOBS) Act creates many exemptions to reduce the cost of going public for smaller issuers that qualify as an Emerging Growth Company (EGC). One set of provisions allows analysts affiliated with an EGC's underwriters to communicate privately with management and potential investors before the IPO. Using a sample of IPOs during 2001–2022, we find that the dispersion in affiliated analysts' initiation forecasts is significantly higher for EGCs than similar IPOs in the pre-JOBS period. A path analysis reveals that the JOBS Act indirectly contributes to the heightened post-IPO stock return volatility through the mediating role of forecast dispersion among affiliated analysts. Our exploratory analyses suggest that more significant variations in affiliated analysts' social connections and their workload tend to be associated with higher forecast dispersion. Overall, our findings indicate that having privileged access to management could reduce consensus among analysts, which can increase post-IPO stock return volatility in EGCs.
Investors' opinion disagreement and abnormal trading around pre-earnings announcements
2024, International Review of Financial Analysis
We use textual analysis techniques to construct a direct measure of investor disagreement to explain the abnormal stock volume and return around earnings expectation announcement in China. We crawl scrape the most a popular Chinese stock forum for individuals' posts about their opinion on a stocks, and classify the posts with machine learning methods. We find that our measure is most correlated with return volatility and historical turnover. We then conduct an event study for abnormal stock volume around pre-earnings announcements, examining the cumulative abnormal turnover for sample groups with prior agreement or disagreement, and with a convergence or divergence of opinion. We find that given prior disagreement of opinion, both convergence and divergence of opinion causing more trading volume in the Chinese market. We also observe the sample group with a divergence of opinion has more cumulative abnormal return than the convergence group. However, this effect is found to be more profound in stocks with higher institutional ownership, which is believed to be correlated with a low short-sale constraint.
Trading halts and the advantage of institutional investors: Historical evidence from Borsa Istanbul
2023, Borsa Istanbul Review
The effects and effectiveness of trading halts remain controversial among academics and regulators. This paper provides historical evidence regarding the efficacy of trading halts from a leading emerging market with a unique microstructure, Borsa Istanbul (Istanbul Stock Exchange), by examining the return, volatility, and volume behavior around news-initiated trading halts using trade-by-trade data and 15-min intervals from January 1999–April 2003. It also investigates, for the first time, the trading behavior of different types of investors, such as individuals, mutual funds, and brokerage houses, around trading halts. Findings indicate that most of the new information is absorbed by prices within 15 min following the resumption of trading after a halt. The reaction of investors to bad news is slower and stronger than good news. Despite halts, institutional investors employ the price advantage of new information during the cessation period ahead of individual investors utilizing better timing in trading after the halts. Institutional investors systematically buy and sell at more favorable prices around halts than individual investors. Finally, overall evidence suggests that trading halts are effective in the dissemination of valuable information and play an important role in enhancing the efficiency of the price discovery mechanism.

View all citing articles on Scopus

^☆: We gratefully acknowledge the comments and suggestions of workshop participants at Columbia, Harvard, Northwestern, the Wharton School, and the University of Wisconsin. We also thank the editor, John Long, and the referee, Michael Barclay, for many helpful suggestions.

View full text

Market reaction to anticipated announcements☆

Abstract

Journal of Financial Economics

Journal of Financial Economics

Journal of Financial Economics

Journal of Economic Theory

Journal of Financial Economics

A theory of intraday patterns: Volume and price variability

Review of Financial Studies

A model of asset trading under the assumption of sequential information arrival

Journal of Finance

Trade and the revelation of information through prices and direct disclosure

Review of Financial Studies