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 <p> around earnings announcements using the method in Stoll (1989). The results show that <p> earnings surprises convey relevant pricing information and that significant information <p> asymmetry exists between the market makers and the informed traders. Around negative <p> earnings announcements the adverse-selection component and the trading volume increase <p> while the inventory-holding and order-processing components decrease. This leads to a <p> decrease in the realized spread. The magnitude of the change in the realized spread appears <p> to be important but the change in the quoted bid-ask spread is negligible. The overall result <p> implies that the informed traders’ ability to assess firms’ performance only affect the bid-ask <p> spread around the time of the earnings announcements.