Oliver Kim

Market liquidity and volume around earnings announcements

Abstract This paper suggests that earnings announcements provide information that allows certain traders to make judgements about a firms performance that are superior to the judgements of other traders. As a result, there may be more information asymmetry at the time of an announcement than in nonannouncement periods. More information asymmetry implies that bid–ask spreads increase, suggesting that market liquidity decreases at the time of an earnings announcement. Furthermore, informed opinions resulting from public disclosure may lead to an increase in trading volume, despite the reduction in liquidity that accompanies announcements.

Pre-announcement and event-period private information

Abstract Pre-announcement information is private information gathered in anticipation of a public disclosure. Event-period information is private information useful in conjunction with the announcement itself. Typically rational models of trade are based exclusively on one type of information. Such models are less descriptive of real market settings and misspecified empirically. Therefore, we introduce a model of rational trade with both features and discuss its implications.

Introducing convexity into optimal compensation contracts

Abstract We study when it is appropriate to add a convex component such as stock options to an optimal, managerial compensation contract. We show that convexity is introduced when managers have moderate levels of relative risk aversion and decreasing absolute risk aversion. In addition, we study how convexity is affected as the distribution of outcomes becomes more skewed toward low outcomes. Here we show that while convexity increases when skewness is increased without regard to the effect on mean stock price, the opposite effect results when increases in skewness leave the mean stock price unchanged.

Partner selection and group formation in cooperative benchmarking

Abstract This paper investigates partner selection and group formation in cooperative benchmarking, a practice of information sharing among firms to improve their operations. Firms gather preliminary information about potential partners only when the choice problem is difficult, and more information is gathered when there is more uncertainty. Based on an analysis of benchmarking benefits and costs, there is a unique equilibrium group structure characterized by a segregation of firms by their stock of technological information. It is argued that todays changing business environment tends to increase group size and the number of firms participating in cooperative benchmarking.

The Value Relevance of Earnings and the Prediction of One-Year-Ahead Cash Flows

In this paper we examine the validity of using one-year-ahead cash flows prediction tests as a substitute for the value relevance test of earnings. We show theoretically that the R2 of the cash flows prediction regression is contaminated by the presence of (1) noise in the cash flows and (2) spurious, i.e., value-unrelated, correlation between one-year-ahead cash flows and current earnings. We test if either of the above two factors contribute to the result of Kim and Kross (2005) that the ability of earnings to predict one-year-ahead cash flows has increased over the recent decades, in contrast to the evidence of decreasing value relevance of earnings. We find empirical evidence that both factors contributed to their result and conclude that the cash flows prediction test is a poor substitute for the value relevance test of earnings.

An Analytical Measure of Market Underreactions to Earnings Surprises

We show that strategic informed trading that arises from information asymmetry (i.e., the difference in the precision of information) between the liquidity demander and the liquidity provider results in underreaction to earnings announcements. The price impact of a trade increases with the precision of the information used exclusively by the liquidity demander, but decreases with the precision of the information used by the liquidity demander and provider. The post-earnings announcement drift increases with both the price impact of a trade and the squared correlation coefficient between order imbalance and earnings surprise. We discuss several testable implications of our analytical results.

Market Underreactions to Earnings Surprises: An Analytical Measure and Empirical Evidence

We show that strategic informed trading that arises from information asymmetry (i.e., the difference in the precision of information) between the liquidity demander and the liquidity provider results in underreaction to earnings announcements. The price impact of a trade increases with the precision of the information used exclusively by the liquidity demander, but decreases with the precision of the information used by the liquidity demander and provider. The post-earnings announcement drift increases with both the price impact of a trade and the squared correlation coefficient between order imbalance and earnings surprise. We discuss several testable implications of our analytical results.

Strategic Informed Trading and the Market Reaction to Earnings Announcements

We show that strategic informed trading that arises from information asymmetry (i.e., the difference in the precision of information) between the liquidity demander and the liquidity provider results in underreaction to earnings announcements. The price impact of a trade increases with the precision of the information used exclusively by the liquidity demander, but decreases with the precision of the information used by the liquidity demander and provider. The post-earnings announcement drift increases with both the price impact of a trade and the squared correlation coefficient between order imbalance and earnings surprise. We discuss several testable implications of our analytical results.