Earnings Announcements and Probability of Informed Trading

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This research project examines whether contemporaneous announcements of actual earnings and management earnings forecasts affect the probability of information-based trade(PIN), information asymmetry among investors, using the data from the Tokyo Stock Exchange. My main findings are as follows. First, PIN is positively associated with cross-shareholdings for Japanese firms after controlling for other determinants of information asymmetry. Second, individuals' trading is so naive as if they use nothing other than the information released at the time of earning announcement, while institutions' trading is so sophisticated. Finally, the information asymmetry for firms disclosing management earnings forecasts at the time of earning announcement is lower than those for non-disclosing firms and the result is primarily caused by lowering the incentives to search for private information. This finding suggests that simultaneously reporting the actual earnings along with the management earnings forecast leads to reductions in information asymmetry among investors.