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Information Precision, Transaction Costs, and Trading Volume

17 Pages Posted: 29 Oct 1997 Last revised: 21 Jun 2017

Orie E. Barron

Pennsylvania State University

Jonathan M. Karpoff

University of Washington - Michael G. Foster School of Business

Date Written: June 10, 2004

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 Classification: G14, D81, D82

Suggested Citation

Barron, Orie E. and Karpoff, Jonathan M., Information Precision, Transaction Costs, and Trading Volume (June 10, 2004). Journal of Banking and Finance, Vol. 28, No. 6, 2004. Available at SSRN: https://ssrn.com/abstract=11230 or http://dx.doi.org/10.2139/ssrn.11230

Orie E. Barron

Pennsylvania State University ( email )

University Park, PA 16802-3306
United States
814-863-3230 (Phone)
814-863-8393 (Fax)

Jonathan M. Karpoff (Contact Author)

University of Washington - Michael G. Foster School of Business ( email )

Box 353226
Seattle, WA 98195-3200
United States
206-685-4954 (Phone)
206-221-6856 (Fax)

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