News-Driven Return Reversals Liquidity Provision Ahead of Earnings News; six-fold increase in short-term return reversals during earnings announcements relative to non-announcement periods

June 22, 2013 Leave a comment

News-Driven Return Reversals: Liquidity Provision Ahead of Earnings News

Eric C. So Massachusetts Institute of Technology (MIT) – Sloan School of Management

Sean Wang University of North Carolina – Kenan-Flagler Business School

June 7, 2013

Abstract: 
This study documents a six-fold increase in short-term return reversals during earnings announcements relative to non-announcement periods. Following prior research, we use reversals as a proxy for expected returns market makers demand for providing liquidity. Our findings suggest that market makers demand higher expected returns prior to earnings announcements because of increased inventory risks that stem from holding net positions through the release of anticipated earnings news. These findings indicate that increases in market makers’ inventory risks result in reduced liquidity through a channel distinct from adverse selection risks and that pre-announcement demand for liquidity provision results in predictable variation in earnings announcement returns. We also use pre-announcement option prices to show that return reversals increase when there is greater expected volatility during earnings announcements. Collectively, our findings suggest that uncertainty regarding anticipated information events elicits predictable increases in expected returns to liquidity provision and that these increases significantly affect the dynamics and information content of market prices.

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Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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