The High-Volume Return Premium and Post-Earnings Announcement Drift

Abstract:     
This paper investigates the relationship among trading volume around earnings announcements, earnings forecast errors, and subsequent returns. Prior research finds a positive relation between earnings announcement period trading volume and subsequent returns (the high-volume return premium) and between earnings forecast errors and subsequent returns (post-earnings announcement drift). We find that for a sample of firms followed by analysts these effects are complementary, i.e., each retains incremental ability to predict post-earnings announcement returns. Prior research provides two competing explanations for the high-volume return premium: changes in firm visibility versus differences in risk. We provide evidence that seems to rule out risk-based explanations while supporting the visibility hypothesis.

Number of Pages in PDF File: 43

Keywords: Market efficiency, Trading volume, High-volume return premium, Post-earnings announcement drift

JEL Classification: G14, G29, M41

working papers series