An Empirical Analysis of the Effects of Online Trading on Stock Price and Trading Volume Reactions to Earnings Announcements*

Abstract

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.

The impact of regulation Fair Disclosure on investors' prior information quality — Evidence from an analysis of changes in trading volume and stock price reactions to earnings announcements

“…Our measure of abnormal trading volume (ABVOL) controls for non-information based trade such as trading due to liquidity or portfolio rebalancing and is similar to the abnormal volume measures used by Atiase and Bamber (1994), Kross et al (1994) and Ahmed et al (2003). 5 We use two pre-FD periods because we expect firms to have responded to the proposal of FD.…”

Market reaction to takeover rumour in Internet Discussion Sites

“…Online trading has replaced traditional brokering for many investors and introduced new investors to the market as a result of lower costs and increased convenience (Barber and Odean, 1999;Ahmed et al, 2003). Historically, the exchange of information between corporate management and securities analysts and the release of information on a selective basis to clients has enhanced the value of the information provided by traditional brokers.…”

An investigation on the relationship between quarterly earnings adjustment and market value in selected firms listed on TSE Exchange

“…During the past few years, there have been different studies associated with the effects of earning adjustment on other financial figures. Ahmed et al (2010) provided some evidence on the effects of online trading on stock price and trading volume reactions to quarterly earnings announcements. They examined for differences in stock price and volume reactions to quarterly earnings announcements between a period some data for the period 1996-99 with online trading and a period without online trading and their findings were relevant for assessing the validity of concerns about online trading expressed by regulators.…”