Market fragmentation and post-earnings announcement drift

Abstract

This paper examines the effects of dark and lit market fragmentation around both earnings announcements and earnings surprises. Results indicate that both dark and lit market fragmentation increase around earnings announcements. Further, I test whether dark and lit fragmentation hinder the level of price discovery around the earnings announcement, resulting in greater post-earnings announcement drift, PEAD. The analysis reveals that lit fragmentation has no significant impact on PEAD while dark fragmentation reduces the level of PEAD for stocks with positive earnings surprises. This result is consistent with the notion that dark venues capture more uninformed trading around positive news events, resulting in greater informed trading and higher informational efficiency in the lit venue. However, the results also indicate that dark fragmentation leads to stronger PEAD for stocks with negative earnings surprises. This last finding suggests that informed traders migrate to dark venues around negative earnings surprises, consistent with previous research that argues informed traders follow passive trading strategies around negative news events.