Underreaction, Trading Volume and Post Earnings Announcement Drift

51 Pages Posted: 24 Oct 2001

See all articles by Wonseok Choi

Wonseok Choi

Harvard University - Department of Economics

Jung-Wook Kim

Seoul National University - Graduate School of Business

Abstract

In this paper, we develop a simple model in which trading volume contains information about future stock returns. Specifically, our model explains why high trading volume is observed when a firm announces earnings news and how trading volume can be related to the initial underreaction of the stock price. Our model has a clear testable implication that high abnormal trading volume predicts a stronger drift. We test our model's implication and find strong evidence for the model in the case of positive news. Weaker evidence is found in the case of negative news. We also discuss possible explanations for the asymmetric informativeness of trading volume.

JEL Classification: G14

Suggested Citation

Choi, Wonseok and Kim, Jung-Wook, Underreaction, Trading Volume and Post Earnings Announcement Drift. Available at SSRN: https://ssrn.com/abstract=287817 or http://dx.doi.org/10.2139/ssrn.287817

Wonseok Choi

Harvard University - Department of Economics ( email )

Littauer Center
Cambridge, MA 02138
United States
617-491-4520 (Phone)
617-491-4520 (Fax)

Jung-Wook Kim (Contact Author)

Seoul National University - Graduate School of Business ( email )

Seoul, 151-742
Korea, Republic of (South Korea)

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