Do Designated Market Makers Facilitate Price Informativeness? Evidence from Earnings Announcements

Authors

Neil Bhattacharya, Southern Methodist University - Accounting DepartmentFollow
Bidisha Chakrabarty, Saint Louis University - Richard A. Chaifetz School of BusinessFollow
Lei Ma, Southern Illinois University - Southern Illinois University at CarbondaleFollow
Jing Pan, Pennsylvania State University - Department of AccountingFollow

Publication Date

4-6-2022

Abstract

Designated market makers (DMMs) are contractually obligated to increase liquidity provision when trading volume breaches a floor. Using this feature in a regression discontinuity design, we show that increased DMM participation facilitates price informativeness with respect to earnings news. Enhanced DMM participation is associated with greater informed trading, as evidenced by more short selling on negative news and more SEC EDGAR searches before earnings announcements. DMM effects are stronger when market uncertainty is high, capital constraints are tight, and in down markets. Our results highlight the value of obligatory liquidity provision during scheduled corporate events with high fundamental information flows.

Document Type

Article

Keywords

Designated Market Makers; Earning Announcements; Jump Ratio; Return Synchronicity; Regression Discontinuity

Disciplines

Accounting

DOI

10.2139/ssrn.4060375

Source

SMU Cox: Accounting (Topic)

Language

English