Earnings Announcements and Market Depth*

Abstract

Abstract. This paper investigates how strategic trading around the time of earnings announcements affects market liquidity (e.g., bid‐ask spreads). We model an investor with private information in advance of an earnings announcement (e.g., inside information). The investor trades before and after the earnings announcement in a market populated by liquidity‐motivated traders who have some discretion over the timing of their trades. The main result of the analysis is that an earnings announcement that reduces an insider's private information may lead to a less liquid market in the postannouncement period.

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