An Empirical Analysis of the Effects of Online Trading on Investor Reactions to Earnings Announcements

41 Pages Posted: 15 May 2001

See all articles by Anwer S. Ahmed

Anwer S. Ahmed

Texas A&M University - Mays Business School

Richard A. Schneible Jr.

State University of New York (SUNY) at Albany

Douglas E. Stevens

Georgia State University - Robinson College of Business

Date Written: December 2001

Abstract

This study provides evidence regarding the effects of online trading on stock market reactions to quarterly earnings announcements. We test for differences in stock price and volume reactions to quarterly earnings announcements between a period with a significant amount of online trading (1996-1999) and a period without online trading (1992-1995). We conjecture that online trading has increased the proportion of naive investors in the market. Based on noisy rational expectations models of trade, we predict that this will result in larger stock price and trading volume reactions to earnings announcements. We find strong evidence in support of these predictions. The stock price results suggest that the advent of online trading has decreased average prior precision and the trading volume results suggest that online trading has increased differential belief revisions around earnings announcements. An analysis of the relation between volume reactions and price reactions in both periods suggests that the increase in differential belief revisions is primarily due to an increase in the differential interpretation of earnings announcements in the online trading period. Our findings are relevant for assessing the validity of concerns about online trading expressed by regulators and the validity of theoretical models of trade with asymmetrically informed investors.

Keywords: Online trading; Noisy rational expectations; Differential interpretations; Market reaction

JEL Classification: G14, M41

Suggested Citation

Ahmed, Anwer S. and Schneible, Richard and Stevens, Douglas E., An Empirical Analysis of the Effects of Online Trading on Investor Reactions to Earnings Announcements (December 2001). Available at SSRN: https://ssrn.com/abstract=268065 or http://dx.doi.org/10.2139/ssrn.268065

Anwer S. Ahmed (Contact Author)

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States

Richard Schneible

State University of New York (SUNY) at Albany ( email )

Albany, NY 12222
United States

Douglas E. Stevens

Georgia State University - Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States
404-413-7212 (Phone)
404-413-7203 (Fax)

HOME PAGE: http://robinson.gsu.edu/profile/douglas-e-stevens/

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