Keywords: Role of analysts; Information asymmetry; Adverse selection; Return reversal; Earnings announcements
JEL Classification: G12; G14
학회소식
[2022년 5차 CAFM2022]Mixed Roles of Analysts: Announcement Return Reversal and Information Asymmetry
작성자 : 관리자
조회수 : 360
게시일 :
2022-12-20
We argue that financial analysts serve mixed roles in the financial market. On the one hand, analysts help attenuate information asymmetry between firm insiders and investors. On the other hand, the information possessed by analysts is by nature private and creates another layer of information asymmetry for uninformed investors. Using short-term stock return reversal as a proxy for costs of liquidity provision, we confirm our predictions on the mixed roles of analysts. Our main finding is that while analyst activities attenuate return reversal during normal market conditions, they exacerbate return reversal around earnings announcements when there is high information uncertainty and rich private information. We find that compared to market reactions during normal market conditions, there is a stronger private reaction but a weaker public reaction to analyst revisions prior to earnings announcements. This suggests that analysts likely disseminate their private information to selected investors prior to earnings announcements. As such, uninformed investors or market makers become reluctant to trade against informed investors and demand high returns for liquidity provision, leading to strong return reversal. Further decomposing the components of the bid-ask spread, we show direct evidence that for stocks with analyst revisions, there is a significantly higher adverse selection component during the pre-earnings announcement window.
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