Do voluntary disclosures of bad news improve liquidity?

European Journal of Business and Management, 2017

The earnings management is used by companies to smooth out fluctuations in earnings. But it take advantage of how accounting rules are applied and creates financial statements that inflate earnings. Thus, studying the earnings management proves to be essential for better governance. The main purpose of this paper is to argue the extent that earnings management lowers liquidity. It should increase information asymmetry and impair trading liquidity. Using a sample of French firms from 2008 to 2011, we find that firms that manage earnings have wider bid-ask spreads. Our results are robust for both of two well-established measures of market liquidity. Therefore, the empirical results indicate that firms that exhibit greater earnings management are associated with lower market liquidity. These findings are in line with adverse selection and shed light on the role corporate governance devices can play in the consideration of shareholder interest's protection, which leads to improved stock market liquidity levels.

Applied Economics Letters, 2010

Financial Accounting eJournal, 2016

We show that strategic informed trading that arises from information asymmetry (i.e., the difference in the precision of information) between the liquidity demander and the liquidity provider results in underreaction to earnings announcements. The price impact of a trade increases with the precision of the information used exclusively by the liquidity demander, but decreases with the precision of the information used by the liquidity demander and provider. The post-earnings announcement drift increases with both the price impact of a trade and the squared correlation coefficient between order imbalance and earnings surprise. We discuss several testable implications of our analytical results.

SSRN Electronic Journal, 2004

This paper investigates the relation between the post-earnings-announcement drift anomaly and different aspects of liquidity. First, we find that, on average, bad-news firms (low standardized unexpected earnings (SUE)) are less liquid than good-news firms (high SUE), reflecting more information asymmetry and/or uncertainty among bad-news firms. Second, we argue that good-news firms are more sensitive to market-wide liquidity variations than bad-news firms. Finally, we find that when considering transaction costs, the risk-adjusted returns of the standard SUE-based trading strategy disappear after an investment amount of $200 million. Our results highlight the fundamental relation between the post-earnings-announcement drift and liquidity.

Journal of Business Finance & Accounting, 1996

2005

This paper investigates the relation between the post-earnings-announcement drift anomaly and different aspects of liquidity. First, we find that, on average, bad-news firms (low standardized unexpected earnings (SUE)) are less liquid than good-news firms (high SUE), reflecting more information asymmetry and/or uncertainty among bad-news firms. Second, we argue that good-news firms are more sensitive to market-wide liquidity variations than bad-news firms. Finally, we find that when considering transaction costs, the risk-adjusted returns of the standard SUE-based trading strategy disappear after an investment amount of $200 million. Our results highlight the fundamental relation between the post-earnings-announcement drift and liquidity.

SSRN Electronic Journal, 2013

This study documents a six-fold increase in short-term return reversals during earnings announcements relative to non-announcement periods. Following prior research, we use reversals as a proxy for expected returns market makers demand for providing liquidity. Our findings highlight significant time-series variation in the magnitude of short-term return reversals and suggest that market makers demand higher expected returns prior to earnings announcements because of increased inventory risks that stem from holding net positions through the release of anticipated earnings news. Collectively, our findings suggest that uncertainty regarding anticipated information events elicits predictable increases in the compensation demanded for providing liquidity and that these increases significantly affect the dynamics and information content of market prices. & 2014 Elsevier B.V. All rights reserved. from the need to locate a counterparty in order to complete a trade. Market makers typically mitigate this friction by matching would-be sellers with would-be buyers. When there is an imbalance between the quantities sought by buyers and sellers at a given price, market makers may absorb the order imbalance into their own account by serving as the trade counterparty. 1 This practice is commonly known as liquidity provision. This article's contribution is to study how the expected returns to liquidity provision change prior to anticipated information events. The theoretical motivation for this Contents lists available at ScienceDirect

European Financial Management, 2005

We evaluate whether the market reacts rationally to profit warnings by testing for subsequent abnormal returns. Warnings fall into two classes: those that include a new earnings forecast, and those that offer only the guidance that earnings will be below current expectations. We find significant negative abnormal returns in the first three months following both types of warning. There is also evidence that underreaction is more pronounced when the disclosure is less precise. Abnormal returns are significantly more negative following disclosures that offer only qualitative guidance than when a new earnings forecast is included.

Scandinavian Journal of Management, 2002

There is a wealth of evidence of a certain delay in the market's adjustment to published earnings information. However, there is a shortage of studies focusing on whether this behaviour can be explained at least partially by the level and quality of disclosures released together with earnings. This paper explores whether the degree of disclosure is related to the market reaction, and in particular whether the quantity and quality of disclosure affects the adjustment of security prices to interim earnings announcements. Evidence on the pricing of disclosures is also presented. The data comprises interim reports submitted to the Helsinki Exchanges in the period 1985-93. Interim reports are used because they relate to a specific event conveying new and previously unpublished material to the market, in contrast to annual reports which primarily document the history of the previous year. It is found that both disclosure and earnings are important in explaining drift, and our results indicate that the drift is associated with disclosure. These results augment the non-US market evidence of this drift. r (H.J. Schadewitz), kanto@hkkk.fi (A.J. Kanto). 0956-5221/02/$ -see front matter r 2002 Elsevier Science Ltd. All rights reserved. PII: S 0 9 5 6 -5 2 2 1 ( 0 1 ) 0 0 0 2 3 -9

Journal of Corporate Finance, 2021

We examine managers' disclosure decisions in response to stock underpricing. Using mutual fund fire sales as an exogenous source of market-disruption, we show some firms respond by increasing frequency/precision of earnings guidance. Other firms, especially those with weakerperformance and more short-term-oriented investors, engage in accrual-based earnings management. To identify efficacy of firms' decisions, we utilize two plausibly exogenous changes in response to fire sales: specifically, following SOX-passage and Regulation FD firms increased reliance on guidance rather than earnings management. The shift is associated with faster postfire sales price recovery, suggesting enhancing information disclosure rather than manipulation is effective in correcting stock underpricing.