When Earnings Meet Auctions

• In Event: 4.04. Market Structure and Financial Reporting

Abstract

We provide initial empirical evidence on how auctions, rather than continuous trading, react to earnings news and evaluate the information content of auction-derived earnings announcement returns. Using a laboratory setting from China where the first trade after earnings announcements is a stand-alone opening auction, we argue that auctions have the potential to reveal the consensus view of information-based investors on earnings news. We show that auction-derived earnings announcement returns represent an efficient reaction to earnings news, while subsequent intraday trading reverses the reaction and leads to underreaction to earnings. Due to the underreaction, opening auction returns at earnings announcements exhibit strong predictability for future stock returns. This predictability is associated with the predictability for future fundamentals and is more pronounced when the information environment is opaque. The results imply that when auctions are the first trade to interact with earnings news, they generate value-relevant signals by extracting the market’s consensus views on earnings news in a relatively short window.

Authors

• Ole-Kristian Hope, University of Toronto - Rotman School of Management

• Danqi Hu, Northwestern University

• Junhao Liu, University of Toronto - Rotman School of Management