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The Growth of Information Asymmetry Between Earnings Announcements and Its Implications for Reporting Frequency

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  • Robert Stoumbos

    (Accounting Division, Columbia Business School, New York, New York 10027)

Abstract

I demonstrate that, on average, information asymmetry grows between earnings announcements and falls right after each new earnings announcement. I estimate that percent effective spreads typically grow 3.1% over the course of the inter-announcement period. I demonstrate that this inter-announcement growth in information asymmetry occurs gradually throughout the entire inter-announcement period and not just right before each new earnings announcement. This inter-announcement growth has implications for reporting frequency decisions. A semiannual reporter that switches to quarterly reporting cuts the growth time in half by cutting each semiannual reporting period into two quarterly reporting periods. As a result, it reduces information asymmetry in what would have been the second half of the semiannual reporting period. I confirm this in a European setting, showing that the average reduction in bid-ask spreads from the inter-announcement growth channel is 1.6% when firms switch from semiannual to quarterly reporting.

Suggested Citation

  • Robert Stoumbos, 2023. "The Growth of Information Asymmetry Between Earnings Announcements and Its Implications for Reporting Frequency," Management Science, INFORMS, vol. 69(3), pages 1901-1928, March.
    • Handle: RePEc:inm:ormnsc:v:69:y:2023:i:3:p:1901-1928
    DOI: 10.1287/mnsc.2022.4408
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    References listed on IDEAS

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