Predisclosure Trading Volume and Firm Size: A Test of the Economic Rationale for the Differential Information Hypothesis
33 Pages Posted: 30 Apr 2004
Date Written: April 30, 2004
Atiase  hypothesized that private information production and dissemination prior to an earnings announcement is an increasing function of firm size. The economic rationale behind this hypothesis was that large firms have higher share liquidity, which conceals informed trade and increases the return to private information acquisition. While empirical researchers commonly use firm size as a control variable for the quality of predisclosure information, the economic rationale behind the differential information hypothesis has not been verified. Using all 10 CRSP firm size deciles, we document a positive relation between predisclosure share turnover and firm size. We find that predisclosure share turnover is positively related to institutional investment and analyst following, suggesting that sophisticated investors are attracted to highly liquid firms where they can conceal their informed trades. We also find evidence that predisclosure share turnover increases the amount of earnings-related information impounded in stock price in the predisclosure period, but this effect is driven by small firms. Investors in large firms appear to be successful at concealing their informed trades.
Keywords: Predisclosure Trading Volume, Firm Size, Differential Information Hypothesis
JEL Classification: D40, D82, G12, G14, M41
Suggested Citation: Suggested Citation