TY - JOUR
T1 - Information precision, transaction costs, and trading volume
AU - Barron, Orie E.
AU - Karpoff, Jonathan M.
N1 - Funding Information:
We thank participants at seminars at the Indiana-Notre Dame-Purdue Summer Research Conference, the annual meeting of the American Accounting Association, the University of Washington, and Emory University, and especially two anonymous referees, for helpful comments. This research was supported in part by the University of Washington School of Business summer research discretionary fund.
PY - 2004/6
Y1 - 2004/6
N2 - Most theoretical models of trade (Pfleiderer, 1984; Grundy and McNichols, 1989; Holthausen and Verrecchia, 1990; Kim and Verrecchia, 1991; Blume et al., 1994) imply that the trading volume prompted by a public announcement is positively related to the announcement's precision. Relying upon this notion, empirical researchers interpret high trading volume as an indication that an announcement is highly informative. We argue that such interpretations are not, in general, correct. In a world with transaction costs, the relation between information precision and trading volume is ambiguous and can be negative. This explains why, in empirical tests using data from actual markets, the relation between announcement precision and trading volume is not monotonically positive, even though in laboratory experiments it is. Our results imply that trading volume reactions to public announcements are most sensitive to announcement precision among low-transaction cost securities and in low-cost trading regimes.
AB - Most theoretical models of trade (Pfleiderer, 1984; Grundy and McNichols, 1989; Holthausen and Verrecchia, 1990; Kim and Verrecchia, 1991; Blume et al., 1994) imply that the trading volume prompted by a public announcement is positively related to the announcement's precision. Relying upon this notion, empirical researchers interpret high trading volume as an indication that an announcement is highly informative. We argue that such interpretations are not, in general, correct. In a world with transaction costs, the relation between information precision and trading volume is ambiguous and can be negative. This explains why, in empirical tests using data from actual markets, the relation between announcement precision and trading volume is not monotonically positive, even though in laboratory experiments it is. Our results imply that trading volume reactions to public announcements are most sensitive to announcement precision among low-transaction cost securities and in low-cost trading regimes.
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U2 - 10.1016/S0378-4266(03)00115-8
DO - 10.1016/S0378-4266(03)00115-8
M3 - Article
AN - SCOPUS:2342653012
SN - 0378-4266
VL - 28
SP - 1207
EP - 1223
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
IS - 6
ER -