1 Bid-Ask Spreads Surrounding Earnings Announcements: Evidence from the Italian Bourse

Studies of market reaction surrounding earnings announcements use bid-ask spreads to proxy for information asymmetry. We argue that the use of spreads posted by NYSE specialists or Nasdaq dealers clouds previous tests since dealer spreads confound a number of factors, including inventory holding costs and the market power of dealers. This study addresses this problem by examining bid-ask spreads surrounding earnings announcements for stocks listed on the Italian Bourse. Since the stocks examined trade in a purely order-driven environment, the problems encountered in previous studies are mitigated. This enables a cleaner test of information asymmetry surrounding earnings announcements. New evidence is provided that bid-ask spreads increase significantly around earnings announcements, in contrast to previous studies using daily data. JEL Classification: G1