Investors' Trade Size and Trading Responses Around Earnings Announcements: An Empirical Investigation

Posted: 27 Feb 2001

See all articles by Neil Bhattacharya

Neil Bhattacharya

Singapore Management University - School of Accountancy; Southern Methodist University (SMU) - Accounting Department

Date Written: November 22, 2000

Abstract

Prior research suggests that the earnings expectations of a segment of the market can be described by the seasonal random-walk model. Prior research also provides evidence that less wealthy and less informed investors tend to make smaller trades (small traders) than wealthier and better informed investors (large traders).

I hypothesize that it is the earnings expectations of small traders that are associated with predictions from the seasonal random-walk model. By directly analyzing the trading activities of small and large traders, this study provides evidence that is largely consistent with the hypotheses.

Specifically, small traders' trading response around earnings announcements is increasing in the magnitude of seasonal random-walk forecast errors even after controlling for absolute analyst forecast errors, contemporaneous price changes, and market-wide trading. Supplementary analysis reveals that this effect is largely confined to firms with relatively impoverished information environments (i.e., smaller firms and firms with little to moderate analyst following).

Keywords: Earnings announcements, information asymmetry, market microstructure, trading volume

JEL Classification: G14, G29, M41

Suggested Citation

Bhattacharya, Neil, Investors' Trade Size and Trading Responses Around Earnings Announcements: An Empirical Investigation (November 22, 2000). Accounting Review, April 2001. Available at SSRN: https://ssrn.com/abstract=257710

Neil Bhattacharya (Contact Author)

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Southern Methodist University (SMU) - Accounting Department ( email )

United States
214-768-3082 (Phone)
214-768-4099 (Fax)

HOME PAGE: http://www.cox.smu.edu

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