Price, Trading Volume And Bid-Ask Spreads Around Earnings Announcements

Under the assumption of information asymmetry, we use event study analysis, simultaneous-equation approach and Hausman Test for endogensis to examine the interactions of price, trading volume and bid-ask spreads on the earnings announcement?Prior studies have implicitly assumed that these reactions are unrelated. Consequently, they have employed a single-equation estimation approach (e.g., Atiase and Bamber 1994; Coller and Yohn 1997; Lobo and Tung 2000). But, these reactions of stock returns, trading volume and bid- ask spreads are, in fact, interrelated and related to each other. Unfortunately, this approach often leads to biased and inconsistent parameter estimates (Pindyck and Rubinfeld 1998). Therefore, some recent studies utilize a simultaneous-equation approach. The estimates are closer to their theoretically predicted values than those based on the traditional single- equation approach. To mitigate these problems, our study uses a simultaneous-equation approach to model these interactions. We select 133 companies from sample stocks in Shanghai's 180 indexes. The samples of our study contain 266 events during the period 2002-2003.The empirical results can be summarized as follows:First, there are a growth in bid-ask spreads, trading volume and cumulative abnormal returns around earnings announcements. Second, following Hausman Test for endogenesis. Test results show that relations among bid-ask spreads, trading volume and stock returns around earnings announcements are simultaneous determined. The equation-by-equation estimation can lead to biased and inconsistent parameter estimates. From the 3SLS estimations, it is evident that when both trade sides under asymmetric information, the bid-ask spreads, trading volume and stock returns reactions to annual earnings announcements in the capital market are interrelated.