Information Dispersion in Financial Markets

Public disclosures can level information asymmetry in financial markets by removing informed traders’ advantage, or can exacerbate asymmetry by further increasing these traders’ knowledge of the firm. This study finds evidence of the latter phenomenon in earnings conference calls, where management releases new information, and financial analysts on the call immediately respond and question management. The linguistic tone of analyst questions moves the stock price almost instantly in a manner that suggests that analyst assessment of management disclosures contains information not present in the disclosures themselves. Additional findings suggest that, in reacting to analyst tone, the market anticipates future analyst predictions and recommendations on the company, which can explain why prior studies have found mixed evidence on the subsequent market reaction to the release of those predictions and recommendations.