Academic journal article Review of Business & Finance Studies

The Trading Costs of Early Earnings Release: The Case of Hewlett-Packard Company

Academic journal article Review of Business & Finance Studies

The Trading Costs of Early Earnings Release: The Case of Hewlett-Packard Company

Article excerpt


Hewlett-Packard Company scheduled to announce its 2014 second quarter earnings after the market closed on May 22, 2014. However, its second quarter earnings report was accidently released earlier than scheduled. The lower-than-expected revenue news dropped Hewlett-Packard's stock price by 5% within 6 minutes. The rare occurrence of an early earnings announcement during trading hours provides an opportunity to investigate the influence of early earnings release on trading costs of market participants. The results show that Hewlett-Packard's stock trading costs, measured by bid-ask spreads increased and its information asymmetry decreased after the early earnings release.

JEL: G14

KEYWORDS: Early Earnings Release, Trading Costs, Bid-Ask Spreads, Information Asymmetry

(ProQuest: ... denotes formulae omitted.)


Hewlett-Packard Company (symbol: HPQ) was expected to announce its earnings report for fiscal 2014 second quarter (Q2, ended on April 30, 2014) after the market closed on May 22, 2014. However, on May 22, 2014, HPQ's Q2 earnings results were accidently released about half an hour prior to 4:00 PM EDT. HPQ's Q2 revenue was $27.3 billion, 1% decline from the prior-year period and lower than Wall Street analysts' expectation of $27.41 billion (Chan, 5/22/2014, Reuters). Based on the minute-to-minute plots of HPQ's price per share on Figure 1 (shown in empirical results section), HPQ's price per share was still around $33 at 3:30 PM EDT on May 22, 2014. After the early release of less-thanexpected revenue, HPQ's share price quickly dropped to $31.35, almost the lowest price of the day, at 3:36 PM EDT. That means the stock price of HPQ decreased by $1.65 (5%) within only 6 minutes. After 3:36 PM EDT, HPQ's price per share moved up a little and then fluctuated until 4:00 PM EDT, closing at $31.78.

Although its Q2 revenue missed the market's expectation, HPQ reported Q2 non-GAAP diluted net earnings per share (EPS) of $0.88, 1% up from the previous year period and same as analysts' consensus. In addition, HPQ announced plans to cut additional 11,000 to 16,000 jobs (Chan, 5/22/2014, Reuters', McGrath, 5/22/2014, Forbes). After the negative and positive news fully digested by investors overnight, HPQ's price per share opened at $32.31 on the next trading day, May 23, 2014, and then swiftly went up to $33.04 at 9:38 AM EDT, the similar price before earnings results were inadvertently released. It reached the highest point of $34.07 at 10:31 AM EDT and then moved between $33.5 and $34.05 throughout the rest of day; eventually it closed at $33.72 on May 23, 2014.

Since it is rare to see a large publicly traded company inadvertently releases its quarterly earnings report earlier than the schedule, the early earnings release during the trading hours provides us an opportunity to investigate its effect on the market microstructure. This research uses HPQ as a case study to examine changes of intraday transaction costs and information asymmetry before and after early earnings release during the trading hours of the announcement date. The remaining sections of this study are organized as follows. The literature review is presented on the next section. Following that, data and methodology are described and then the empirical results are shown. The conclusion is made lastly.


Previous studies about the components of the bid-ask spread, the determinants of the bid-ask spread, the intraday pattern of the bid-ask spread, and the effect of earnings announcement on information asymmetry and the bid-ask spread were documented in the literature. Copeland and Galai (1983) indicate two types of traders in the market, liquidity traders and informed traders. Liquidity traders trade to get immediacy and informed traders trade based on their special information. The market maker is expected to gain from liquidity traders but lose to informed traders. If the market maker sets a wider bid-ask spread, he or she will reduce the potential loss to informed traders, but will also reduce the expected gain from liquidity traders. …

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