Does trading volume increase or decrease prior to earnings announcements?

• In Event: Accounting Policies and Financial Reporting

Abstract

This paper reports two empirical regularities regarding the trading volume pattern prior to scheduled earnings announcements. The first finding is that pre-announcement trading volume increases in firms with high analyst coverage. The second finding is that pre-announcement trading volume decreases less in good news than bad news firms when the analyst coverage is low. Our findings suggest that the intensity of pre-emptive analyst reports and the managerial tendency to voluntarily disclose good news early jointly determine the direction and magnitude of pre-announcement trading volume even when the liquidity traders have the timing discretion in their equity trading around earnings announcements. We contribute to the literature on the information content of earnings announcements by showing that analysts’ information discovery prior to earnings announcements understates the magnitude of trading volume response to earnings announcements in high coverage firms.

Authors

• Sangwan Kim, University of Massachusetts-Boston

• Steve C Lim, Texas Christian University