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The Changing Behavior of Trading Volume Reactions to Earnings Announcements: Evidence of the Increasing Use of Accounting Earnings News by Investors

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  • Orie E. Barron
  • Richard A. Schneible
  • Douglas E. Stevens

Abstract

The increase in investor diversity over the last 35–40 years prompted us to revisit trading volume reactions to earnings announcements and how these reactions vary with firm size. We argue that this increase in investor diversity would likely increase differences in the precision of pre‐announcement information around earnings announcements, particularly for large firms. This suggests that the role of earnings announcements in resolving investor disagreement, as reflected in trading volume reactions, has increased. Over the 35‐year period 1977–2011, we find a dramatic increase in the magnitude and frequency of volume reactions to earnings announcements, particularly for large firms. The increase in large firms’ trading volume reactions is so pronounced that the relation between volume reactions and firm size has turned positive in recent years, reversing Bamber's (, ) previously documented negative relation. We provide intuition and empirical evidence that our results are attributable to the resolution of differential prior precision among increasingly diverse investors following large firms. Évolution des réactions du volume des opérations sur valeurs à la publication des résultats : données sur l'utilisation croissante des communiqués sur les résultats comptables par les investisseurs La diversité croissante des investisseurs au cours des 35 à 40 dernières années incite les auteurs à réexaminer les réactions du volume des opérations sur valeurs à la publication des résultats et la façon dont ces réactions varient selon la taille de l'entreprise. Les auteurs estiment que cette croissance de la diversité des investisseurs est susceptible d'augmenter les écarts dans la précision de l'information antérieure à la publication des résultats durant la période entourant la communication des résultats, en particulier dans le cas des grandes entreprises. Il semble donc que le rôle de la publication des résultats dans la résolution des divergences d'opinion des investisseurs, dont témoignent les réactions du volume des opérations sur valeurs, ait gagné en importance. Au cours de la période de 35 ans écoulée entre 1977 et 2011, les auteurs relèvent une augmentation considérable de l'ampleur et de la fréquence des réactions du volume des opérations sur valeurs à la publication des résultats, en particulier dans le cas des grandes entreprises. La hausse du volume des opérations sur valeurs des grandes entreprises est si spectaculaire que la relation entre les réactions du volume et la taille de l'entreprise est désormais positive depuis quelques années, ce qui réfute l'existence d'une relation négative précédemment documentée par Bamber (1986, 1987). Les auteurs démontrent empiriquement l'hypothèse posée selon laquelle leurs résultats sont attribuables à la résolution des écarts précédents dans la précision de l'information chez les investisseurs de plus en plus diversifiés qui s'intéressent aux grandes entreprises.

Suggested Citation

  • Orie E. Barron & Richard A. Schneible & Douglas E. Stevens, 2018. "The Changing Behavior of Trading Volume Reactions to Earnings Announcements: Evidence of the Increasing Use of Accounting Earnings News by Investors," Contemporary Accounting Research, John Wiley & Sons, vol. 35(4), pages 1651-1674, December.
  • Handle: RePEc:wly:coacre:v:35:y:2018:i:4:p:1651-1674
    DOI: 10.1111/1911-3846.12371
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    References listed on IDEAS

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    1. Anzhela Knyazeva & Diana Knyazeva & Leonard Kostovetsky, 2018. "Investor heterogeneity and trading," European Financial Management, European Financial Management Association, vol. 24(4), pages 680-718, September.
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    Cited by:

    1. Keith Czerney & Jaime J. Schmidt & Anne M. Thompson, 2019. "Do Investors Respond to Explanatory Language Included in Unqualified Audit Reports?," Contemporary Accounting Research, John Wiley & Sons, vol. 36(1), pages 198-229, March.
    2. Edward A. E. Jones & Anthony K. Kyiu & Hao Li, 2021. "Earnings informativeness and trading frequency: Evidence from African markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 1064-1086, January.
    3. Tao Chen, 2022. "Investor Protection and Post-Disclosure Disagreement: International Evidence," The International Journal of Accounting (TIJA), World Scientific Publishing Co. Pte. Ltd., vol. 57(03), pages 1-28, September.
    4. Bonsall, Samuel B. & Green, Jeremiah & Muller, Karl A., 2020. "Market uncertainty and the importance of media coverage at earnings announcements," Journal of Accounting and Economics, Elsevier, vol. 69(1).
    5. Neenu C & T Mohamed Nishad, 2022. "Behavior of Financial Markets Around News Announcements: A Review Based on Bibliometric Analysis of Scientific Fields," The Review of Finance and Banking, Academia de Studii Economice din Bucuresti, Romania / Facultatea de Finante, Asigurari, Banci si Burse de Valori / Catedra de Finante, vol. 14(2), pages 143-172, December.
    6. Elayan, Fayez A. & Pacharn, Parunchana & Li, Jennifer & Brown, Kareen & Chen, Yijia, 2023. "The market response to mandatory disclosure of payments to foreign governments," The British Accounting Review, Elsevier, vol. 55(6).
    7. D’Augusta, Carlo & De Vito, Antonio & Grossetti, Francesco, 2023. "Words and numbers: A disagreement story from post-earnings announcement return and volume patterns," Finance Research Letters, Elsevier, vol. 54(C).

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