Earnings Announcements and Attention Constraints: The Role of Market Design

We identify a new channel – market makers' attention constraints – through which earnings announcements for one stock affect the liquidity of other stocks. When some stocks handled by a designated market maker have earnings announcements, liquidity is lower for non-announcement stocks handled by the same market maker, with the largest effects coming from earnings surprises and stocks with high earnings response coefficients. Half of the liquidity decline reflects attention constraints binding on the individual market maker, and the other half is explained by the market maker's inventory. We further find that a market design change that increases automation alleviates the liquidity effect of attention constraints, despite an increase in the number of stocks allocated to each market maker.