Information Production, Volume, and Return Dynamics

48 Pages Posted: 2 Dec 2015 Last revised: 11 Jan 2016

See all articles by Clark Liu

Clark Liu

Tsinghua University - PBC School of Finance

Lei Mao

The Chinese University of Hong Kong, Shenzhen

Mark S. Seasholes

Arizona State University (ASU)

Date Written: January 8, 2016

Abstract

We study volume-return dynamics using a framework in which information flows are endogenously determined and linked to a firm's investment activities. The framework generates time-varying differences of opinion (across investor types) and trading volume, especially when a firm receives unexpectedly positive news. In addition, the framework produces cross-sectional variation in the ability of volume shocks to predict future returns (often referred to as the "high volume return premium"). Using monthly CRSP data, we document that the high volume return premium is economically and statistically stronger (increases from 5.5% to over 10% per annum) for firms exhibiting poor stock market performance prior to volume shocks; for firms receiving positive news contemporaneously with a volume shock; and for firms with high degrees of information asymmetry. Volume shocks around earnings announcements provide additional support for this information-based framework.

Keywords: information content of volume, high volume return premium, cross-sectional returns

JEL Classification: G12; G14; D83

Suggested Citation

Liu, Clark and Mao, Lei and Seasholes, Mark S., Information Production, Volume, and Return Dynamics (January 8, 2016). Available at SSRN: https://ssrn.com/abstract=2697725 or http://dx.doi.org/10.2139/ssrn.2697725

Clark Liu (Contact Author)

Tsinghua University - PBC School of Finance ( email )

No. 43, Chengdu Road
Haidian District
Beijing 100083
China

Lei Mao

The Chinese University of Hong Kong, Shenzhen ( email )

Mark S. Seasholes

Arizona State University (ASU) ( email )

Farmer Building 440G PO Box 872011
Tempe, AZ 85287
United States

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