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The Real Side of the High-Volume Return Premium

45 Pages Posted: 1 Feb 2017 Last revised: 10 Nov 2017

Doron Israeli

IDC Herzliya - Arison School of Business

Ron Kaniel

University of Rochester - Simon Business School; CEPR

Suhas A. Sridharan

Emory University - Goizueta Business School

Date Written: November 8, 2017

Abstract

A leading explanation for the high-volume return premium, first discovered by Gervais, Kaniel and Mingelgrin (2001), is the idea that extreme trading activity of a stock increases its visibility and is associated with a subsequent reduction in a firm's cost of capital. We provide evidence in support of this explanation by showing that unexpected increases in a stock's trading volume are associated with higher future corporate investment. A one standard deviation increase in unexpected trading volume is associated with 1.4% increase in annual investment expenditures and with 13.6% increase in the annual change in investment expenditures. We provide further support for this explanation by showing that the positive relation between high trading volume and future corporate investment is concentrated among firms with high financial constraints and firms with lower levels of investor recognition.

Keywords: Trading volume; Corporate investment; Financial constraints; Investor recognition

JEL Classification: E22, G12, G14, M41

Suggested Citation

Israeli, Doron and Kaniel, Ron and Sridharan, Suhas A., The Real Side of the High-Volume Return Premium (November 8, 2017). Simon Business School Working Paper No. FR 17-07. Available at SSRN: https://ssrn.com/abstract=2909494

Doron Israeli (Contact Author)

IDC Herzliya - Arison School of Business ( email )

P.O. Box 167
Herzliya, 46150
Israel
+972 9 952 7673 (Phone)

Ron Kaniel

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

HOME PAGE: http://rkaniel.simon.rochester.edu

CEPR ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

Suhas Sridharan

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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