High-frequency traders and price informativeness during earnings announcements

• Published in: Review of accounting studies 2020-09, Vol.25 (3), p.1156-1199
• Main Authors: Bhattacharya, Nilabhra, Chakrabarty, Bidisha, Wang, Xu (Frank)
• Format: Article
• Language: English
• Subjects: Accounting/Auditing; Business and Management; Corporate Finance; Earnings announcements; High frequency trading; Liquidity; Public Finance
• ISSN: 1380-6653; 1573-7136
• DOI: 10.1007/s11142-020-09550-z

High frequency traders (HFTs) account for a significant fraction of the total market volume. Prompted by concerns that HFTs reap unfair advantages over other traders by using super-fast trading technologies, some regulatory proposals aim to curb HFTs’ ultra-low-latency activities. However, research suggests that HFTs also play beneficial roles in financial markets, including liquidity provision as voluntary market makers. Currently, little is known about their role in incorporating firm-specific fundamental information into prices. Employing a novel dataset that identifies trades by HFTs and non-HFTs, we find that earnings response coefficients are larger and abnormal price impact of trades are lower when HFTs trade more following earnings announcements, suggesting that HFTs facilitate efficient assimilation of earnings news. HFTs also enhance the forecasting capabilities of financial analysts. Furthermore, HFT participation increases return synchronicity around earnings announcements when multiple firms in the same industry announce earnings on the same day. The evidence suggests that HFTs help incorporate relevant industry information, and this effect arises from HFTs’ liquidity supplying function. We address the endogenous preference of HFTs for large and liquid stocks by including multiple controls for firm size and liquidity, implementing abnormal or change specification for the price impact tests, and performing pre-treatment placebo tests for all of our analyses.