Predisclosure Trading Volume and Firm Size: A Test of the Economic Rationale for the Differential Information Hypothesis

33 Pages Posted: 30 Apr 2004

See all articles by Richard A. Schneible Jr.

Richard A. Schneible Jr.

State University of New York (SUNY) at Albany

Douglas E. Stevens

Georgia State University - Robinson College of Business

Date Written: April 30, 2004

Abstract

Atiase [1980] 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

Schneible, Richard and Stevens, Douglas E., Predisclosure Trading Volume and Firm Size: A Test of the Economic Rationale for the Differential Information Hypothesis (April 30, 2004). Available at SSRN: https://ssrn.com/abstract=537922 or http://dx.doi.org/10.2139/ssrn.537922

Richard Schneible

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

Albany, NY 12222
United States

Douglas E. Stevens (Contact Author)

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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