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An Empirical Analysis of the Effects of Online Trading on Stock Price and Trading Volume Reactions to Earnings Announcements *
Author(s) -
Ahmed Anwer S.,
Schneible Richard A.,
Stevens Douglas E.
Publication year - 2003
Publication title -
contemporary accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 2.769
H-Index - 99
eISSN - 1911-3846
pISSN - 0823-9150
DOI - 10.1506/n2xd-tf8y-jt4l-l6v0
Subject(s) - earnings , stock (firearms) , stock price , economics , algorithmic trading , price–earnings ratio , trading strategy , financial economics , earnings response coefficient , stock trading , econometrics , monetary economics , stock market , business , earnings per share , accounting , mechanical engineering , paleontology , horse , series (stratigraphy) , engineering , biology
This study provides evidence regarding the effects of online trading on stock price and trading volume reactions to quarterly earnings announcements. We test for differences in stock price and volume reactions to quarterly earnings announcements between a period with a significant amount of online trading (1996‐99) and a period without online trading (1992‐95). We conjecture that online trading has increased the proportion of naive investors in the market. We predict that this will result in (1) a decrease in the average precision of investor information prior to earnings announcements leading to higher earnings response coefficients (ERCs), (2) an increase in differential interpretation of earnings leading to higher trading volume reactions that are unrelated to price change, and (3) a decrease in differential prior precision leading to a decrease in the association between trading volume and absolute price change. We find evidence consistent with all three predictions. Our findings are relevant for assessing the validity of concerns about online trading expressed by regulators and the validity of theoretical models of trade with asymmetrically informed investors.