Earnings announcements, trading volume, and price discovery: evidence from dual class firms

Earnings announcements, trading volume, and price discovery: evidence from dual class firms This paper investigates price discovery between control shares (the superior voting class) and public shares (the inferior voting class) issued by 62 dual-class firms around 148 quarterly earnings announcements from January 2002 to June 2008. We document substantial informed trading in both control and public shares. The average price discovery of control shares is 46.6 % for positive events and 40.5 % for negative events during the event periods. In addition, before the earnings announcements, abnormal trading volume and price discovery increase significantly in control shares relative to public shares. We find price discovery of control shares increases with relative volume of control shares to public shares and relative bid-ask spread but decreases with relative institutional ownership and relative volatility. Our results suggest that publicly traded superior voting class contributes to price discovery substantially, especially before earnings announcements when the information asymmetry is high. The listing of control shares not only enhances price efficiency, but also provides opportunities for outside sophisticated investors to get voting rights and engage in monitoring. Our study sheds new light on the issues of price discovery and corporate governance of dual-class firms. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Quantitative Finance and Accounting Springer Journals

Earnings announcements, trading volume, and price discovery: evidence from dual class firms

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Publisher
Springer Journals
Copyright
Copyright © 2013 by Springer Science+Business Media New York
Subject
Economics / Management Science; Finance/Investment/Banking; Accounting/Auditing; Econometrics; Operations Research/Decision Theory
ISSN
0924-865X
eISSN
1573-7179
D.O.I.
10.1007/s11156-013-0422-4
Publisher site
See Article on Publisher Site

Abstract

This paper investigates price discovery between control shares (the superior voting class) and public shares (the inferior voting class) issued by 62 dual-class firms around 148 quarterly earnings announcements from January 2002 to June 2008. We document substantial informed trading in both control and public shares. The average price discovery of control shares is 46.6 % for positive events and 40.5 % for negative events during the event periods. In addition, before the earnings announcements, abnormal trading volume and price discovery increase significantly in control shares relative to public shares. We find price discovery of control shares increases with relative volume of control shares to public shares and relative bid-ask spread but decreases with relative institutional ownership and relative volatility. Our results suggest that publicly traded superior voting class contributes to price discovery substantially, especially before earnings announcements when the information asymmetry is high. The listing of control shares not only enhances price efficiency, but also provides opportunities for outside sophisticated investors to get voting rights and engage in monitoring. Our study sheds new light on the issues of price discovery and corporate governance of dual-class firms.

Journal

Review of Quantitative Finance and AccountingSpringer Journals

Published: Nov 29, 2013

References

  • Option trading, price discovery, and earnings news dissemination
    Amin, KI; Lee, CMC
  • Evidence that analyst following and institutional ownership accelerate the pricing of future earnings
    Ayers, BC; Freeman, RN
  • Trading volume around earnings announcements and other financial reports: theory, research design, empirical evidence, and directions for future research
    Bamber, LS; Barron, OE; Stevens, DE
  • Price discovery and trading after hours
    Barclay, MJ; Hendershott, T

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