The Changing Behavior of Trading Volume Reactions to Earnings Announcements: Evidence of the Increasing Use of Accounting Earnings News by Investors

The increase in investor diversity over the last 35–40 years prompted us to revisit trading volume reactions to earnings announcements and how these reactions vary with firm size. We argue that this increase in investor diversity would likely increase differences in the precision of pre-announcement information around earnings announcements, particularly for large firms. This suggests that the role of earnings announcements in resolving investor disagreement, as reflected in trading volume reactions, has increased. Over the 35-year period 1977–2011, we find a dramatic increase in the magnitude and frequency of volume reactions to earnings announcements, particularly for large firms. The increase in large firms’ trading volume reactions is so pronounced that the relation between volume reactions and firm size has turned positive in recent years, reversing Bamber's (,) previously documented negative relation. We provide intuition and empirical evidence that our results are attributable to the resolution of differential prior precision among increasingly diverse investors following large firms.