Evidence that Investors Trade on Private Event-Period Information Around Earnings Announcements

Abstract

Holthausen and Verrecchia's (1990) and Kim and Verrecchia's (1997) theoretical models predict that private information inferred at the time of an earnings announcement (private event-period information) is associated with greater trading volume. We provide empirical evidence consistent with these theories. Specifically, announcements that increase analysts' private information (as measured by Barron, et al.'s 1998 empirical proxies) are associated with increased trading volume, consistent with some investors similarly acquiring private event-period information. In addition, announcements that decrease analysts' consensus are associated more trading volume. Because consensus declines when private information increases, this finding provides reinforcing evidence that investors trade following earnings announcements because of private information that becomes useful only in conjunction with the information in the announcement and that this information is important enough to spur trading. Empirically, our analyses demonstrate that our theoretically-derived measures of analysts' private information and consensus remain significant after controlling for other determinants of trading volume documented in prior research (e.g., change in dispersion of analysts' forecasts, belief jumbling, earnings surprise, and firm size).

Keywords: Trading volume, private information, analysts' forecasts

JEL Classification: G10, G29, M41, M45