2017 - Reprints: Finance, Accounting and Insurance
Asymmetric decrease in liquidity trading before earnings announcements and the announcement return premium, Journal of Financial Economics, 118, 383-398, 2015.
S. Levi and X.-J. Zhang
(Reprint No. 323)
Research no.: 08120100
Investors are reluctant to trade in the high-information-asymmetry days before earnings announcements. We show that the decrease in liquidity trading before announcements is asymmetric. We analyze buy and sell orders of investors with passive investment strategies, and find they do not reduce their sales as much as their purchases in the days before announcements. Investors needing liquidity sell stocks at a discount relative to the post-announcement price, and these preannouncement liquidity sales are a significant driver of the average positive returns, or return premium, known to characterize announcement days.
Do temporary increases in information asymmetry affect the cost of equity?, Management Science, 61(2), 354-371, 2015.
S. Levi and X.-J. Zhang
(Reprint No. 324)
Research no.: 08130100
Prior literature finds that long-lasting changes in firms’ disclosure policies and information environment affect the cost of equity. Information asymmetry, however, also changes during the fiscal quarter. Firms disclose information periodically, and in between disclosure dates, traders can obtain private information, and adverse-selection risk increases. Such temporary increases in information asymmetry are usually considered to be diversifiable or too small to impact expected stock returns. In addition, investors may postpone trades or sell other assets in their portfolio on high information asymmetry days. We, however, find that returns increase significantly on days during the fiscal quarter when adverse-selection risk is high and liquidity low. Consistent with theory, we show that temporary asymmetry affects returns when investors demand liquidity and market makers bear risk for carrying capacity and providing it.
