Disagreement after News: Gradual Information Diffusion or Differences of Opinion?
44 Pages Posted: 7 Aug 2016
Date Written: July 31, 2016
This paper explores the long-standing empirical fact of increased trading volume around news releases through the lens of canonical models of gradual information diffusion and differences of opinion. I use a unique dataset of clicks on news by key finance professionals to distinguish between trading among investors who see the news at different times and trading among investors who see the same news but disagree regarding its interpretation. Consistent with gradual information diffusion, dispersion in the timing of investors' attention is strongly predictive of daily volume around earnings announcements and volume within minutes of individual news articles. Furthermore, delayed attention is predictive of minute-level return continuation, daily-level post-earnings-announcement drift, and monthly-level return momentum. The results are robust to using the unpredictable component of news positioning as an instrument for delayed attention. Differences of opinion, measured as heterogeneity in the investors clicking on the news, is generally weaker in explaining trading volume around news, but plays a larger role when the news is more textually ambiguous.
Keywords: information diffusion, disagreement, price formation, trading volume
JEL Classification: G12, G14, G02
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