Hostname: page-component-78c5997874-dh8gc Total loading time: 0 Render date: 2024-11-15T04:33:56.040Z Has data issue: false hasContentIssue false
  • English
  • Français

Differential Interpretations and Trading Volume

Published online by Cambridge University Press:  06 April 2009

Linda Smith Bamber ,
Orie E. Barron  and
Thomas L. Stober
Linda Smith Bamber
Affiliation:
University of Georgia, Terry College of Business, 255 Brooks Hall, Athens, GA 30602
Orie E. Barron
Affiliation:
Pennsylvania State University, 203 Beam Business Administration Building, University Park, PA 16802
Thomas L. Stober
Affiliation:
University of Notre Dame, College of Business Administration, Notre Dame, IN 46556
Get access Rights & Permissions [Opens in a new window]

Abstract

This study provides evidence that differential interpretations are an important stimulus for speculative trading. We measure differential interpretations using data on analysts' revisions of forecasts of annual earnings after the announcement of quarterly earnings that are components of those annual earnings numbers. We find two conditions under which differential interpretations play a significant role in explaining trading. First, we present empirical evidence supporting Kandel and Pearson's (1995) argument that trading coincident with small price changes reflects investors' differential interpretations of information. This evidence is important because it is inconsistent with conventional models of trade that assume homogeneous interpretations. Second, we also find that differential interpretations explain a significant amount of the trading occurring in a sample where trading volume is higher than the (firm-specific) non-announcement period average. This result is consistent with informed traders acting on their differential interpretations when there is enough liquidity trading to help camouflage their own information-based trades. In sum, the study's results confirm Bachelier's (1900) intuition that differential interpretations are an important stimulus for trading.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 34 , Issue 3 , September 1999 , pp. 369 - 386
Copyright
Copyright © School of Business Administration, University of Washington 1999

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Admati, A., and Pfleiderer, P.. “A Theory of Intraday Patterns: Volume and Price Variability.” Review of Financial Studies, 1 (Spring 1988), 3–40.CrossRefGoogle Scholar
Bachelier, L. “Theory of Speculation,” (translation of the 1900 French Edition). In The Random Character of Stock Prices, Cootner, P. H., ed. Cambridge, MA: MIT Press (1964), 17–78.Google Scholar
Bamber, L. S. “Unexpected Earnings, Firm Size, and Trading Volume around Quarterly Earnings Announcements.” Accounting Review, 62 (07 1987), 510–532.Google Scholar
Bamber, L., and Cheon, Y.. “Differential Price and Volume Reactions to Accounting Earnings Announcements.” Accounting Review, 70 (07 1995), 417–441.Google Scholar
Froot, K. “Consistent Covariance Matrix Estimation with Cross-Sectional Dependence and Heteroskedasticity in Financial Data” Journal of Financial and Quantitative Analysis, 24 (09 1989), 333–355.CrossRefGoogle Scholar
Kandel, E., and Pearson, N.. “Differential Interpretation of Public Signals and Trade in Speculative Markets” Journal of Political Economy, 103 (08 1995), 831–872.CrossRefGoogle Scholar
Karpoff, J. “A Theory of Trading Volume” Journal of Finance, 41 (12 1986), 1069–1087.CrossRefGoogle Scholar
Karpoff, J. “The Relation between Price Changes and Trading Volume: A Survey.” Journal of Financial and Quantitative Analysis, 22 (03 1987), 109–126.CrossRefGoogle Scholar
Kim, O., and Verrecchia, R.. “Trading Volume and Price Reactions to Public Announcements.” Journal of Accounting Research, 29 (Autumn 1991), 302–321.CrossRefGoogle Scholar
Klepper, S., and Leamer, E.. “Consistent Sets of Estimates for Regressions with Errors in All Variables” Econometrica, 52 (01 1984), 163–183.CrossRefGoogle Scholar
Kyle, A. “Continuous Auctions and Insider Trading” Econometrica, 53 (11 1985), 1315–1335.CrossRefGoogle Scholar
Stickel, S. “The Timing of and Incentives for Annual Earnings Forecasts Near Interim Earnings Announcements.” Journal of Accounting and Economics, 11 (07 1989), 275–292.CrossRefGoogle Scholar
Tkac, P. “A Trading Volume Benchmark: Theory and Evidence.” Journal of Financial and Quantitative Analysis, 34 (03 1999), 89–114.CrossRefGoogle Scholar