Not All Trading Volumes are Created Equal: Capital Gains Overhang and the Earnings Announcement Volume Premium

59 Pages Posted: 5 Jun 2008

See all articles by Wonseok Choi

Wonseok Choi

JP Morgan Asset Management

Kenton Hoyem

Financial Engines, Inc.

Jung-Wook Kim

Seoul National University - Graduate School of Business

Date Written: June 2008

Abstract

We examine a possible cause for the higher returns realized by stocks that experience high abnormal trading volume around earnings announcements. We find that this earnings announcement volume premium is concentrated in stocks with either large aggregate unrealized capital gains or large aggregate unrealized capital losses. A high volume minus low volume portfolio conditioned on the magnitude of capital gains overhang generates returns as high as 11% per year. These returns are significant and robust to conventional risk adjustments. Our finding suggests that the high returns accruing to high volume stocks are associated with selling pressure, which is independent of fundamentals, coming from a subset of investors who base their selling decisions on the magnitude of unrealized capital gains or losses. The patterns we document also suggest that the well known disposition effect may not hold for stocks with extreme unrealized capital losses and are consistent with recent theoretical and empirical research that shows extreme losses prompt selling.

Keywords: capital gains overhang, earnings announcement volume premium, disposition effect

JEL Classification: G1, G14

Suggested Citation

Choi, Wonseok and Hoyem, Kenton and Kim, Jung-Wook, Not All Trading Volumes are Created Equal: Capital Gains Overhang and the Earnings Announcement Volume Premium (June 2008). Available at SSRN: https://ssrn.com/abstract=1140743 or http://dx.doi.org/10.2139/ssrn.1140743

Wonseok Choi

JP Morgan Asset Management ( email )

522 Fifth Ave.
New York, NY 10036
United States

Kenton Hoyem

Financial Engines, Inc. ( email )

1804 Embarcadero Road
Palo Alto, CA 94303
United States

Jung-Wook Kim (Contact Author)

Seoul National University - Graduate School of Business ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

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