Title page for ETD etd-07102007-194806

Type of Document Dissertation
Author Yang, Hsiao-Fen
URN etd-07102007-194806
Title Liquidity and Speculative Trading: Evidence from Stock Price Adjustments to Quarterly Earnings Announcements
Degree Doctor of Philosophy (Ph.D.)
Department Finance (Business Administration)
Advisory Committee
Advisor Name Title
Ji-Chai Lin Committee Chair
Gary C. Sanger Committee Member
Robert J. Newman Committee Member
Wei Li Committee Member
Angela M. Woodland Dean's Representative
  • market efficiency
  • behavior finance
  • liquidity
  • speculative trading
Date of Defense 2007-07-09
Availability unrestricted
This dissertation studies whether stock price reactions to quarterly earnings announcements depend on stock liquidity. Baker and Stein (2004) and Scheinkman and Xiong (2003) develop models showing that liquidity can be affected by investor sentiment or speculative trading. With short-sale constraints, liquid stocks have more trading from optimistic, overconfident investors and tend to be overvalued. In this study, we hypothesize that if a liquid stock is overpriced due to intensive speculative trading, the overpricing should be corrected partially or fully after quarterly earnings announcements which convey the information about the fundamental value of stocks and synchronize investors' adjustment to mispricing. Our results show that liquid stocks earn significant lower abnormal returns at the announcements than illiquid stocks. Furthermore, prior to the announcements, liquid stocks also have significant speculative trading. After controlling for other determinants of abnormal returns, we find the return difference between liquid and illiquid stocks during the 12-day earnings announcement period is 4.11%, which is about one-third of the annual liquidity premium. Our findings suggest that the effect of investors' speculative behavior on stock prices is not negligible and that earnings announcements serve as an important mechanism for regulating overpricing caused by speculative trading.
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