Stock Liquidity Around Annual Earning Announcements

Liquidity is an important index to judge the quality of a stock market.The stock liquidity is a problem concerned together by listed firms,investors and supervisors, because the nicer market liquidity makes important sense to improve the financing environment of finns,maintain stabilization of the security market and protect the benefits of small investors.Then it's significative to strengthen the stock liquidity research,especially to China,a burgeoning security market.Information asymmetry is considered to be an important factor that affects the stock liquidity.Substantive researches suggest that the stock liquidity of listed firms can be effectively improved through high quality information exposure.Earning announcements,the important information released by firms,convey information to market in the one hand,and may bring some problems in the other hand,such as divulging information ahead of schedule.This certainly will affect the behavior of investors around the announcements as well as the stock liquidity of firms.There have been many foreign researchers studied the investors behavior,information stations and stock liquidity around the earning announcements in different markets (mainly focused on quote-driven markets).However,the hypotheses they raised and the results they got were not identical.In our country,the research about this aspect is very little.But our market is an order-driven market,which possesses some particularity and significance,so this paper based on the market micro-structure theory analyses the bid-ask spread and illiquidity ratio in the pre- and post-announcement.Meanwhile,this paper uses the LSB(1995) bid-ask spread components analysis model to decompose spread,and studies the effect of the annual earning announcement to each component.This paper adopts event study method and uses high frequency data to do empirical analysis.The results are followed:(1)Before the release of annual earning announcement,the bid-ask spread and illiquidity ratio both extend,the market liquidity exacerbates.(2)After the release of annual earning announcement,comparing to before the release,the bid-ask spread and illiquidity ratio are both minished,the market liquidity is improved,though it is still exacerbated comparing with non-released period.(3)The release of annual announcement has no significant effect to the adverse selection component in the bid-ask spread,and the effect to the absolute value of adverse selection cost is consistent to the effective bid-ask spread.(4) Price persistence phenomenon exists in Shenzhen market significantly,and the probability reaches the culmination before the announcement.In the day which the annual earning announcement released,the probability decreases significantly.(5) In each period,bid-ask spread decomposing shows that the largest component is the order processing component in effective spread,and the adverse selection component and the order persistence component are relatively small but exist significantly.