Brattle Principal Torben Voetmann recently authored a paper investigating the cost components of the bid-ask spread and the changes in the spread around earnings announcements on the small Danish stock market in the 1990s.

The paper builds on prior related analysis of larger, more heavily traded markets, showing that stock prices typically respond to earning announcements, and that their response can be partitioned into positive or negative earnings surprises. The related analysis has also established that earnings announcements convey pricing information, providing a cost advantage to informed investors. Dr. Voetmann notes that studying markets of smaller sizes can be useful for improving the understanding gleaned from the results of older studies of larger markets.

According to the paper’s findings, the changes in the realized bid-ask spread cost components around earnings announcements on the Danish stock market, a smaller and less active capital market, suggest that earnings surprises convey pricing information and significant informational asymmetry between market makers and informed traders. Dr. Voetmann finds that the observed changes in cost components on the small Danish stock market are similar to those observed in larger and more active capital markets. He also concludes that the realized bid-ask spread does not change for positive surprise, but does increase around negative surprises, suggesting greater information asymmetry around unexpectedly negative earnings announcements.

The paper, “The Bid-Ask Spread in the Danish Stock Market: Evidence from the 1990s,” was published in the International Journal of Economics and Finance. The paper can be downloaded here.

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