The Relation Among Disclosure, Returns, and Trading Volume Information

Posted: 12 Jun 2001

See all articles by Oliver Kim

Oliver Kim

University of Maryland

Robert E. Verrecchia

University of Pennsylvania - Accounting Department

Abstract

This paper introduces a model in which the firm's returns depend on trading volume when the firm defers disclosure, because market-makers use volume to draw inferences about better-informed investors' private information on firm value. In addition, we show that a firm's committing to a policy of timely disclosure of a broader range of outcomes dampens the slope coefficient on volume in a Taylor expansion of the log of the absolute value of returns on volume. The reason for this is that when a firm commits to a policy of timely disclosure of a broader range of outcomes, the deferral of a report indicates that the outcome is extreme. This heightens adverse selection. In turn, this makes informed trade more costly and hence less likely, thereby rendering returns less dependent on trading volume as a source of information about firm value. This result predicts that firms committing to more disclosure should experience a smaller slope coefficient on trading volume. Thus, the slope coefficient offers a potential tool for measuring the economic consequences of shifts in disclosure regimes.

Keywords: Disclosure; Trading volume information; Asset pricing

JEL Classification: D82, M41, M45

Suggested Citation

Kim, Oliver and Verrecchia, Robert E., The Relation Among Disclosure, Returns, and Trading Volume Information. The Accounting Review, October 2001. Available at SSRN: https://ssrn.com/abstract=272316

Oliver Kim

University of Maryland ( email )

Rm.4449, Van Munching Hall
College Park, MD 20742-1815
United States
301-405-2243 (Phone)

Robert E. Verrecchia (Contact Author)

University of Pennsylvania - Accounting Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-898-6976 (Phone)
215-573-2054 (Fax)

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