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

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.

This paper was accepted by Suraj Srinivasan, accounting.

Funding: The author gratefully acknowledge financial support from the Yale School of Management and Columbia Business School.

Supplemental Material: The data files are available at https://doi.org/10.1287/mnsc.2022.4408.