An Empirical Analysis of the Effects of Online Trading on Stock Price and Trading Volume Reactions to Earnings Announcements

Posted: 21 Apr 2003

See all articles by Anwer S. Ahmed

Anwer S. Ahmed

Texas A&M University - Mays Business School

Richard A. Schneible Jr.

State University of New York (SUNY) at Albany

Douglas E. Stevens

Georgia State University - Robinson College of Business

Abstract

This study provides evidence on the effects of online trading on stock price and trading volume reactions to quarterly earnings announcements. We test for differences in stock price and volume reactions to quarterly earnings announcements between a period with a significant amount of online trading (1996-1999) and a period without online trading (1992-1995). We conjecture that online trading has increased the proportion of naive investors in the market. We predict that this will result in (i) a decrease in the average precision of investor information prior to earnings announcements implying higher ERCs, (ii) an increase in differential interpretation of earnings leading to higher trading volume reactions that are unrelated to price change, and (iii) a decrease in differential prior precision leading to a decrease in the association between trading volume and absolute price change. We find evidence consistent with all three predictions. Our findings are relevant for assessing the validity of concerns about online trading expressed by regulators and the validity of theoretical models of trade with asymmetrically informed investors.

Keywords: Differential interpretations, Differential prior precision, Online trading, Stock price reaction, Trading volume reaction

JEL Classification: D40, G14, M41

Suggested Citation

Ahmed, Anwer S. and Schneible, Richard and Stevens, Douglas E., An Empirical Analysis of the Effects of Online Trading on Stock Price and Trading Volume Reactions to Earnings Announcements. Contemporary Accounting Research, Vol. 20 No. 3, pp. 413-39, Fall 2003. Available at SSRN: https://ssrn.com/abstract=388761

Anwer S. Ahmed (Contact Author)

Texas A&M University - Mays Business School ( email )

430 Wehner
College Station, TX 77843-4353
United States

Richard Schneible

State University of New York (SUNY) at Albany ( email )

Albany, NY 12222
United States

Douglas E. Stevens

Georgia State University - Robinson College of Business ( email )

P.O. Box 4050
Atlanta, GA 30303-3083
United States
404-413-7212 (Phone)
404-413-7203 (Fax)

HOME PAGE: http://robinson.gsu.edu/profile/douglas-e-stevens/

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