A Theory of Trading Volume Around Earnings Announcements
Posted: 20 Jan 1997
Date Written: November 1996
Kim and Verrecchia (1994) provide a model of trade to explain trading volume around public disclosure which is assumed to be earnings announcement. However, their characterization of information is too general and has no relationship with the accounting information structure. Ohlson (1995) provides a fundamental valuation model that exploits the accounting relationship of earnings, book value, and dividends, but no implication can be made on the trading volume around earnings announcements from his model. We impose an information structure on the Kim and Verrecchia (1994) model whereby some market participants estimate fundamental value of the firm according to Ohlson's (1995) valuation model but differ in their assessment of permanent and transitory components of earnings. Our results demonstrate a positive relation between abnormal earnings and both trading volume and price changes around earnings announcements.
JEL Classification: G41, G12
Suggested Citation: Suggested Citation