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
Keywords	market efficiency behavior finance liquidity speculative trading
Date of Defense	2007-07-09
Availability	unrestricted
Abstract 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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