Earnings dispersion in the spotlight: The effects of media coverage on stock liquidity

Abstract

This paper investigates the changes and dispersion of earnings signals as they proliferated through media coverage on stock liquidity. We determine that the earnings dispersion disseminated by the media will reduce stock liquidity during earnings announcement. By investigating the dissemination effects of earnings dispersion on trading activity, we find that individual investors refrain from providing liquidity to those stocks with highly media-exacerbated earnings dispersion. Institutional investors, however, do not reduce their trading on media-exacerbated earnings dispersion stocks. To identify the causal relation with media coverage, we exploit the variation in information dissemination stemming from actual investor accounts, which represent the ex-ante information breadth of a stock. The results demonstrate that stocks with a larger number of investor accounts have an amplified effect from earnings dispersion on stock illiquidity. These effects are significant for individual accounts, as opposed to institutional accounts. Overall, these results imply that the media create the real impact of earnings dispersion on stock liquidity by directing investors' attention.