Changes in the Bid-Ask Components around Earnings Announcements: Evidence from the Copenhagen Stock Exchange

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 traders’ ability to assess firms’ performance only affect the bid-ask spread around the time of the earnings announcements.