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The earnings announcement premium and trading volume

By Andrea Frazzini, Owen A. Lamont, Nber We, Malcolm Baker, Gur Huberman, Jeffrey Wurgler, Wei Xiong and Especially Nicholas Barberis

Abstract

On average, stock prices rise around scheduled earnings announcement dates. We show that this earnings announcement premium is large, robust, and strongly related to the fact that volume surges around announcement dates. Stocks with high past announcement period volume earn the highest announcement premium, suggesting some common underlying cause for both volume and the premium. We show that high premium stocks experience the highest levels of imputed small investor buying, suggesting that the premium is driven by buying by small investors when the announcement catches their attention. The relation between trading volume and prices in asset markets is not well understood. In the purest neoclassical model with homogenous agents, prices adjust with no trading at all. Risk-based rational asset pricing models attempt to explain expected returns without attempting to explain volume. In this paper, we study the connection between volume and prices by studying regularly scheduled quarterly earnings announcements made by firms. As is well known, these announcements cause both substantial price volatility and substantial increases in volume. In addition, stock prices on average rise in the days around earnings announcements. This earnings announcement premium has been known at least since Beaver (1968) and has since been studied by Chari et al (1988), Ball and Kothari (1991), and Cohen et al (2005)

Publisher: Mimeo
Year: 2006
OAI identifier: oai:CiteSeerX.psu:10.1.1.373.2505
Provided by: CiteSeerX
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