The Speed of the Market Reaction to Pre-Open versus Post-Close Earnings Announcements

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Abstract

We examine whether the timing of earnings announcements relative to regular trading hours affects how quickly equity investors react to earnings information. We hypothesize that pre-open (before the opening bell, PO) earnings announcements provide less time for investors to process the information before the beginning of trading, leading to a slower market response to the earnings news, than post-close (after the closing bell, PC) announcements. Consistent with this prediction, our findings show greater abnormal volatility and trading volume in the days after PO versus PC announcements. We also document a slower incorporation of earnings news into prices for PO versus PC announcements. These findings cannot be explained by firm and earnings characteristics. Further, we find that option trading strategies based on PO versus PC announcements yield economically large returns, suggesting that options traders do not exploit this predictable pattern of differential volatility.