Earnings Announcements, Analyst Forecasts, and Trading Volume

In this paper we investigate whether analysts’ interpretations of an earnings announcement affect the properties of earnings announcements in terms of trading volume. More specifically, we examine how analyst forecasts issued simulataneously with the announcement affect trading volume reaction to stock price changes during the event period. The results show significant excess trading volume for firms with analysts’ announcement forecasts. In addition, we find monotonically increasing trading volume with the number of announcement forecasts, after controlling for absolute stock price change, firm size, and prior stock return volatilities. Since trading volume at the event of earnings announcements are related with information asymmetry among investors (Kim and Verrecchia 1994, 1997), our results suggest that analysts’ additional information have investors have more diverse information set in the market. However, analysts’ forecasts can be beneficiary to investors firms with analysts’ announcement forecasts are more likely to experience higher level of market liquidity during announcement event period.