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Information Precision, Transaction Costs, and Trading Volume

Orie E. Barron
Pennsylvania State University

Jonathan M. Karpoff
University of Washington - Michael G. Foster School of Business

October 10, 1997

Abstract:
Models of trade by Pfleiderer (1984), Holthausen and Verrecchia (1990), and Kim and Verrecchia (1991) imply that the trading volume prompted by a public announcement is positively related to the announcement's precision. Relying upon this notion, empirical researchers interpret high trading volume as an indication that an announcement is highly informative. We show that such interpretations can be incorrect. In a world with transaction costs, the relation between information precision and trading volume is ambiguous, and can be negative. This explains why, in empirical tests, the relation between announcement precision and trading volume is not monotonically positive, even though in laboratory experiments it is. Cross-sectionally, our results imply that trading volume reactions to highly informative announcements will be positive primarily for low-transaction cost securities.

JEL Classifications: G14, D81, D82

Working Paper Series

Date posted: October 29, 1997 ; Last revised: July 31, 2005

Suggested Citation

Barron, Orie E. and Karpoff, Jonathan M., Information Precision, Transaction Costs, and Trading Volume (October 10, 1997). Available at SSRN: http://ssrn.com/abstract=11230 or doi:10.2139/ssrn.11230

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Contact Information

Jonathan M. Karpoff (Contact Author) University of Washington - Michael G. Foster School of Business ( email ) Box 353200 Seattle, WA 98195-3200 United States 206-685-4954 (Phone) 206-221-6856 (Fax)
Orie E. Barron Pennsylvania State University ( email ) University Park, PA 16802-3306 United States 814-863-3230 (Phone) 814-863-8393 (Fax)