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Department of Finance, Copenhagen Business School Working Paper Series, Department of Finance, Copenhagen Business School

No 2000-6:
Changes in The Bid-Ask Components Around Earnings Announcements: Evidence from the Copenhagen Stock Exchange

Torben Voetmann

Abstract: This paper investigates the relative magnitude of the components in the bid-ask spread

around earnings announcements using the method in Stoll (1989). The results show that

earnings surprises convey relevant pricing information and that significant information

asymmetry exists between the market makers and the informed traders. Around negative

earnings announcements the adverse-selection component and the trading volume increase

while the inventory-holding and order-processing components decrease. This leads to a

decrease in the realized spread. The magnitude of the change in the realized spread appears

to be important but the change in the quoted bid-ask spread is negligible. The overall result

implies that the informed tradersí ability to assess firmsí performance only affect the bid-ask

spread around the time of the earnings announcements.

Keywords: Bid-Ask Spread; Earnings Surprises; Asymmetric Information; (follow links to similar papers)

JEL-Codes: G14; (follow links to similar papers)

28 pages, May 3, 2001

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