Abstract

This study consists introductory survey and three essays where investors’ trading responses to interim earnings announcements are studied using Finnish data. The essays are individual papers, but their topics are closely connected since they address the trading response from different angles. The essays progress from an aggregated to a more detailed examination. The first essay was conducted on daily data, whereas the second and third consist of intraday trading data. In all three essays information asymmetry is assumed to affect trading behavior around interim earnings announcements.

The first article contains empirical findings regarding the effect of interim earnings announcements on investors’ trading policy using Finnish data. The aim of the paper is to investigate empirically the role of pre-disclosure information asymmetry and the information content in explaining volume responses to interim earnings announcements. Evidence is provided that the trading volume response is positively associated with the information content and to some extent with the level of pre-disclosure information asymmetry. The results are in line with the theoretical trading volume proposition. However, the significance levels are lower than in similar US studies and the association between positive and negative news is slightly asymmetric.

The second article finds evidence from the Helsinki Stock Exchange that the widely documented U-shape pattern in trading activity — namely heavy trading in the beginning and at the end of the trading day and relatively light trading in the middle of the day — is affected by an anticipated information event (i.e. interim earnings announcement). Before the announcement day, trading is more concentrated at the close. This is consistent with investors’ heterogeneous willingness to bear expected overnight risk, which is especially prevalent before an announcement. Moreover, a slight increase on the open is evident after the announcement day. Evidence is also provided that the change in intraday trading behavior is associated with announcement-related factors, such as the range of analysts’ earnings forecasts, the magnitude of unexpected earnings and firm size. Furthermore, this association is evident to some extent during the transition between trading and non-trading regimes.

The third study examines whether the permanent price effects of individual trades are greater before or after an interim earnings announcement on the Helsinki Stock Exchange. If the permanent price effects are greater before the announcement this would suggest that investors believe that some traders are better informed before the interim earnings announcement than after. Using permanent price effects as a measure of price adjustment for private information, tests were performed to see whether price adjustments are greater in pre-announcement periods than in post-announcement periods. The results, based on interim earnings releases for the period 1993 to 1997 by HSE-listed firms, suggest that large trades do indeed produce greater permanent price effects before an announcement than after it. This suggests that large trades associated with price changes (especially uptick trades) before an announcement send a stronger signal to other investors than similar trades after the announcement. For small trades the results were insignificant.