The Real Side of the High-Volume Return Premium
57 Pages Posted: 1 Feb 2017 Last revised: 5 May 2018
Date Written: April 28, 2018
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 is associated with increased visibility and a 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 and higher cash flows from financing activities. A one standard deviation increase in unexpected trading volume is associated with 1.4\% increase in annual investment expenditures. The positive relation between volume shocks and subsequent investment expenditure is not subsumed by the arrival of investment-related news or other corporate disclosures, nor by subsequent earnings information. We further show that firms experiencing a shock to trading volume also experience higher Google search volume in the following week and 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
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