Differential interpretations and trading volume

Linda Smith Bamber, Orie E. Barron, Thomas L. Stober

Research output: Contribution to journalArticlepeer-review

128 Scopus citations


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.

Original languageEnglish (US)
Pages (from-to)369-386
Number of pages18
JournalJournal of Financial and Quantitative Analysis
Issue number3
StatePublished - Sep 1999

All Science Journal Classification (ASJC) codes

  • Accounting
  • Finance
  • Economics and Econometrics


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