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Does high-frequency trading reduce market underreaction to earnings news?

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  • Ke, Yun
  • Zhang, Yanan

Abstract

This paper examines the impact of high-frequency trading (HFT) on market underreaction to earnings news as measured by the magnitude of post-earnings announcement drift (PEAD). Using a dataset provided by NASDAQ, we are able to better identify HFT activities and reduce measurement errors. We find that the magnitude of PEAD decreases with the increase of HFT. More importantly, we show that this effect is due to HFT's liquidity supplying role (i.e., passive HFT fulfilling market orders), not liquidity demanding role (i.e., HFT initiating market orders). The results also reveal that the effect is more pronounced when earnings surprises are extreme and large. Taken together, HFT seems to help mitigate market inefficiency by providing liquidity.

Suggested Citation

  • Ke, Yun & Zhang, Yanan, 2020. "Does high-frequency trading reduce market underreaction to earnings news?," Finance Research Letters, Elsevier, vol. 34(C).
    • Handle: RePEc:eee:finlet:v:34:y:2020:i:c:s154461231930354x
    DOI: 10.1016/j.frl.2019.07.012
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    Cited by:

    1. Li, Zhaochu & Lytvynenko, Iryna P., 2021. "Currency fluctuations and the post-earnings announcement drift," Finance Research Letters, Elsevier, vol. 40(C).
    2. Khine Kyaw & Mojisola Olugbode & Barbara Petracci, 2022. "Stakeholder engagement: Investors' environmental risk aversion and corporate earnings," Business Strategy and the Environment, Wiley Blackwell, vol. 31(3), pages 1220-1231, March.
    3. Peng Yifeng, 2024. "Internet sentiment exacerbates intraday overtrading, evidence from A-Share market," Papers 2404.12001, arXiv.org, revised Jul 2024.
    4. Ramzi Boussaidi & Majed Ibrahim AlSaggaf, 2024. "Post-Earnings Announcement Drift, Momentum, and Contrarian Strategies in the Saudi Stock Market: Risk Explanation vs. Behavioral Explanation," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 15(3), pages 13622-13653, September.
    5. Ekinci, Cumhur & Ersan, Oğuz, 2022. "High-frequency trading and market quality: The case of a “slightly exposed” market," International Review of Financial Analysis, Elsevier, vol. 79(C).

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    More about this item

    Keywords

    High-frequency trading (HFT); Market underreaction; Earnings news; Post-earnings announcement drift (PEAD);
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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