Components of Earnings-Induced Volume

Abstract:     
Numerous studies, both empirical and analytical, identify causes and provide possible interpretations of cross-sectional variation in trading responses to information releases such as earnings announcements. We extend this line of inquiry within the empirical domain by partitioning volume into two components: (1) participation rate, and (2) participation magnitude. This partitioning explicitly recognizes the fact that similar levels of observed volume response may arise from very different sources. We find that participation rate accounts for approximately 80 percent of the increase in trading around earnings announcements and more than three times the predicted cross-sectional variability in this response. The rate component increases with price response (Karpoff 1986) and large investor activity (Cready 1988) and decreases with firm size and both explicit and liquidity-related costs of transacting (Karpoff 1986). In contrast to Atiase and Bamber's (1994) finding in relation to total volume response, we do not find any evidence that participation magnitude increases with analyst forecast dispersion.

JEL Classification: G12, G29, G32, M41

working papers series