The Real Side of the High-Volume Return Premium

57 Pages Posted: 1 Feb 2017 Last revised: 5 May 2018

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: April 28, 2018

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 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

Suggested Citation

Israeli, Doron and Kaniel, Ron and Sridharan, Suhas A., The Real Side of the High-Volume Return Premium (April 28, 2018). Simon Business School Working Paper No. FR 17-07. Available at SSRN: https://ssrn.com/abstract=2909494 or http://dx.doi.org/10.2139/ssrn.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 )

London
United Kingdom

Suhas A. Sridharan

Emory University - Goizueta Business School ( email )

1300 Clifton Road
Atlanta, GA 30322-2722
United States

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