EARNINGS ANNOUNCEMENTS AND THE COMPONENTS OF THE BID-ASK SPREAD

This study investigates the behavior of the components of the bid-ask spread around earnings announcements. We find that the adverse selecti on cost component significantly increases surrounding the announcement s, while the inventory holding and order processing components signifi cantly decline during the same periods. Our results suggest that the d irectional change in the total bid-ask spread depends on the relative magnitudes of the changes in these three components. Specifically, the decreases in inventory holding costs and order processing costs imply that earnings announcements may have an insignificant impact on the t otal bid-ask spread, even when they result in increased information as ymmetry.