Disagreement, Short Sale Constraints, and Speculative Trading Before Earnings Announcements

57 Pages Posted: 10 Aug 2008

See all articles by Henk Berkman

Henk Berkman

University of Auckland - Business School

Paul D. Koch

Iowa State University - Finance Department; Iowa State University - Finance Department

Date Written: August 8, 2008

Abstract

Consistent with theoretical models of speculative trading, we show that abnormal trading activity increases before earnings announcements, especially for stocks with high dispersion of opinions. Moreover, consistent with Miller's (1977) theory and other disagreement models, for stocks that are also short sale constrained this increased speculative pressure is dominated by buyer-initiated trading. As a result, stocks that are already prone to Miller's overpricing (with high dispersion of opinions and binding short sale constraints) have a further price increase before earnings announcements. Finally, these same stocks have a predictable price reversal after the announcement that dominates the pre-announcement run-up, and is related to the abnormal trading activity before the announcement.

Keywords: market efficiency, speculation, disagreement, dispersion of opinions, limits to arbitrage, institutional ownership, short sale restrictions, overpricing, earnings announcements

JEL Classification: D82, G14, G19

Suggested Citation

Berkman, Henk and Koch, Paul D., Disagreement, Short Sale Constraints, and Speculative Trading Before Earnings Announcements (August 8, 2008). Available at SSRN: https://ssrn.com/abstract=1213265 or http://dx.doi.org/10.2139/ssrn.1213265

Henk Berkman (Contact Author)

University of Auckland - Business School ( email )

Private Bag 92019
Room: 577
Auckland
New Zealand
(64 9) 3737599 Ext. 7181 (Phone)
(64 9) 3737406 (Fax)

Paul D. Koch

Iowa State University - Finance Department

Ivy College of Business
Ames, IA 50011
United States
5152942491 (Phone)

HOME PAGE: http://https://www.business.iastate.edu/directory/pkoch/

Iowa State University - Finance Department

Ames, IA 50011-2063
United States
5152942491 (Phone)

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