Earnings announcements, private information, and strategic informed trading

In this paper, we estimate and test a multi-period model of strategic informed trading developed by Foster and Viswanathan [Foster, F.-D., Viswanathan, S., 1996. Strategic trading when agents forecast the forecasts of others, J. Finance 51, 1437-1478]. We employ the GMM using intertemporal patterns of price, trading volume and market depth, leading up to the earnings announcements made by NYSE firms. We find that multiple informed traders with heterogeneous private signals trade prior to the announcements. In addition, by comparing the results from daily and intra-day estimations, we find that the number of informed traders increases while the intensity of liquidity trading decreases, and that the adverse selection problem becomes more pronounced as the announcements approach.