Differential interpretations and trading volume

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

doi:10.2307/2676264

Differential interpretations and trading volume

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

Research output: Contribution to journal › Article › peer-review

128 Scopus citations

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.

Original language	English (US)
Pages (from-to)	369-386
Number of pages	18
Journal	Journal of Financial and Quantitative Analysis
Volume	34
Issue number	3
DOIs	https://doi.org/10.2307/2676264
State	Published - Sep 1999

All Science Journal Classification (ASJC) codes

Accounting
Finance
Economics and Econometrics

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@article{20fadbe5f1904e7d9aaad7db80fb48f6,

title = "Differential interpretations and trading volume",

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.",

author = "Bamber, {Linda Smith} and Barron, {Orie E.} and Stober, {Thomas L.}",

note = "Funding Information: Bamber, University of Georgia, Terry College of Business, 255 Brooks Hall, Athens, GA 30602; Barron, Pennsylvania State University, 203 Beam Business Administration Building, University Park, PA 16802; and Stober, University of Notre Dame, College of Business Administration, Notre Dame, IN 46556. The authors thank Steve Arnold and Ken Gaver for helpful discussions, and Harold Garland, Jon Karpoff (the editor), Oliver Kim, Jim McKeown, Dale Morse, Phil Shane, Paula Tkac, participants at the Indiana-Notre Dame-Purdue research conference, and Neil Pearson (associate editor and referee) for constructive comments. They also acknowledge the contribution of I/B/E/S International Inc. for providing earnings per share forecast data, available through the Institutional Brokers{\textquoteright} Estimate System. These data have been provided as part of a broad academic program to encourage earnings expectation research. Stober gratefully acknowledges financial support from Arthur Andersen LLP.",

year = "1999",

month = sep,

doi = "10.2307/2676264",

language = "English (US)",

volume = "34",

pages = "369--386",

journal = "Journal of Financial and Quantitative Analysis",

issn = "0022-1090",

publisher = "Cambridge University Press",

number = "3",

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AU - Barron, Orie E.

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PY - 1999/9

Y1 - 1999/9

N2 - 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.

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Differential interpretations and trading volume

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