IDEAS home Printed from https://ideas.repec.org/a/bla/finrev/v57y2022i1p45-67.html
   My bibliography  Save this article

The more we know, the less we agree: A test of the trading horizon heterogeneity theory

Author

Listed:
  • Lili Dai
  • Jerry T. Parwada
  • Donald W. Winchester
  • Bohui Zhang

Abstract

We examine the Kondor theoretical explanation of an enduring puzzle: trading volumes and stock return volatility peak after the release of public information. Using a comprehensive data set of institutional holdings and earnings announcements, we find supporting evidence that the proportion of short‐term investors is positively associated with post‐announcement spikes in trading volume and return volatility. This finding survives in the identification test based on the annual reconstitutions of the Russell 1000 and 2000 indices. We show our results largely withstand several alternative explanations related to the constitution of institutional investors, informed trading, and heterogeneous beliefs.

Suggested Citation

  • Lili Dai & Jerry T. Parwada & Donald W. Winchester & Bohui Zhang, 2022. "The more we know, the less we agree: A test of the trading horizon heterogeneity theory," The Financial Review, Eastern Finance Association, vol. 57(1), pages 45-67, February.
    • Handle: RePEc:bla:finrev:v:57:y:2022:i:1:p:45-67
    DOI: 10.1111/fire.12282
    as

    Download full text from publisher

    File URL: https://doi.org/10.1111/fire.12282
    Download Restriction: no
    File URL: https://libkey.io/10.1111/fire.12282?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Ron Kaniel & Shuming Liu & Gideon Saar & Sheridan Titman, 2012. "Individual Investor Trading and Return Patterns around Earnings Announcements," Journal of Finance, American Finance Association, vol. 67(2), pages 639-680, April.
    2. David O. Lucca & Emanuel Moench, 2015. "The Pre-FOMC Announcement Drift," Journal of Finance, American Finance Association, vol. 70(1), pages 329-371, February.
    3. Bailey, Warren & Andrew Karolyi, G. & Salva, Carolina, 2006. "The economic consequences of increased disclosure: Evidence from international cross-listings," Journal of Financial Economics, Elsevier, vol. 81(1), pages 175-213, July.
    4. Bushee, BJ & Noe, CF, 2000. "Corporate disclosure practices, institutional investors, and stock return volatility," Journal of Accounting Research, Wiley Blackwell, vol. 38, pages 171-202.
    5. Richard W. Sias, 2004. "Institutional Herding," Review of Financial Studies, Society for Financial Studies, vol. 17(1), pages 165-206.
    6. X. Frank Zhang, 2006. "Information Uncertainty and Stock Returns," Journal of Finance, American Finance Association, vol. 61(1), pages 105-137, February.
    7. Alan D. Crane & Sébastien Michenaud & James P. Weston, 2016. "Editor's Choice The Effect of Institutional Ownership on Payout Policy: Evidence from Index Thresholds," Review of Financial Studies, Society for Financial Studies, vol. 29(6), pages 1377-1408.
    8. Vega, Clara, 2006. "Stock price reaction to public and private information," Journal of Financial Economics, Elsevier, vol. 82(1), pages 103-133, October.
    9. Joon Chae, 2005. "Trading Volume, Information Asymmetry, and Timing Information," Journal of Finance, American Finance Association, vol. 60(1), pages 413-442, February.
    10. Appel, Ian R. & Gormley, Todd A. & Keim, Donald B., 2016. "Passive investors, not passive owners," Journal of Financial Economics, Elsevier, vol. 121(1), pages 111-141.
    11. Paul A. Gompers & Andrew Metrick, 2001. "Institutional Investors and Equity Prices," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(1), pages 229-259.
    12. Martin D. D. Evans & Richard K. Lyons, 2017. "How is Macro News Transmitted to Exchange Rates?," World Scientific Book Chapters, in: Studies in Foreign Exchange Economics, chapter 14, pages 547-596, World Scientific Publishing Co. Pte. Ltd..
    13. Grossman, Sanford J & Stiglitz, Joseph E, 1980. "On the Impossibility of Informationally Efficient Markets," American Economic Review, American Economic Association, vol. 70(3), pages 393-408, June.
    14. Verardo, Michela, 2009. "Heterogeneous Beliefs and Momentum Profits," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 44(4), pages 795-822, August.
    15. Péter Kondor, 2012. "The More We Know about the Fundamental, the Less We Agree on the Price," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 79(3), pages 1175-1207.
    16. Xuemin (Sterling) Yan & Zhe Zhang, 2009. "Institutional Investors and Equity Returns: Are Short-term Institutions Better Informed?," Review of Financial Studies, Society for Financial Studies, vol. 22(2), pages 893-924, February.
    17. Shane A. Corwin & Paul Schultz, 2012. "A Simple Way to Estimate Bid‐Ask Spreads from Daily High and Low Prices," Journal of Finance, American Finance Association, vol. 67(2), pages 719-760, April.
    18. Kandel, Eugene & Pearson, Neil D, 1995. "Differential Interpretation of Public Signals and Trade in Speculative Markets," Journal of Political Economy, University of Chicago Press, vol. 103(4), pages 831-872, August.
    19. T. Clifton Green, 2004. "Economic News and the Impact of Trading on Bond Prices," Journal of Finance, American Finance Association, vol. 59(3), pages 1201-1234, June.
    20. Snehal Banerjee & Ron Kaniel & Ilan Kremer, 2009. "Price Drift as an Outcome of Differences in Higher-Order Beliefs," Review of Financial Studies, Society for Financial Studies, vol. 22(9), pages 3707-3734, September.
    21. Boone, Audra L. & White, Joshua T., 2015. "The effect of institutional ownership on firm transparency and information production," Journal of Financial Economics, Elsevier, vol. 117(3), pages 508-533.
    22. Wayne R. Landsman & Edward L. Maydew, 2002. "Has the Information Content of Quarterly Earnings Announcements Declined in the Past Three Decades?," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 797-808, June.
    23. Gaspar, Jose-Miguel & Massa, Massimo & Matos, Pedro, 2005. "Shareholder investment horizons and the market for corporate control," Journal of Financial Economics, Elsevier, vol. 76(1), pages 135-165, April.
    24. Bin Ke & Kathy Petroni, 2004. "How Informed Are Actively Trading Institutional Investors? Evidence from Their Trading Behavior before a Break in a String of Consecutive Earnings Increases," Journal of Accounting Research, Wiley Blackwell, vol. 42(5), pages 895-927, December.
    25. Harris, Milton & Raviv, Artur, 1993. "Differences of Opinion Make a Horse Race," Review of Financial Studies, Society for Financial Studies, vol. 6(3), pages 473-506.
    26. Beyer, Anne & Cohen, Daniel A. & Lys, Thomas Z. & Walther, Beverly R., 2010. "The financial reporting environment: Review of the recent literature," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 296-343, December.
    27. Franklin Allen & Stephen Morris & Hyun Song Shin, 2006. "Beauty Contests and Iterated Expectations in Asset Markets," Review of Financial Studies, Society for Financial Studies, vol. 19(3), pages 719-752.
    28. Chen, Xia & Harford, Jarrad & Li, Kai, 2007. "Monitoring: Which institutions matter?," Journal of Financial Economics, Elsevier, vol. 86(2), pages 279-305, November.
    29. Hellwig, Martin F., 1980. "On the aggregation of information in competitive markets," Journal of Economic Theory, Elsevier, vol. 22(3), pages 477-498, June.
    30. Snehal Banerjee & Ilan Kremer, 2010. "Disagreement and Learning: Dynamic Patterns of Trade," Journal of Finance, American Finance Association, vol. 65(4), pages 1269-1302, August.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Timo Lehmann & Matthias Weber, 2023. "Auctions versus bookbuilding: The effects of IPO regulation in Japan," The Financial Review, Eastern Finance Association, vol. 58(1), pages 117-141, February.
    2. Justin Cox & Bonnie Van Ness & Robert Van Ness, 2022. "Stock splits and retail trading," The Financial Review, Eastern Finance Association, vol. 57(4), pages 731-750, November.

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Kondor, Péter, 2011. "The more we know on the fundamental, the less we agree on the price," CEPR Discussion Papers 8455, C.E.P.R. Discussion Papers.
    2. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    3. Anzhela Knyazeva & Diana Knyazeva & Leonard Kostovetsky, 2018. "Investor heterogeneity and trading," European Financial Management, European Financial Management Association, vol. 24(4), pages 680-718, September.
    4. Sonya Zhu, 2023. "Volume dynamics around FOMC announcements," BIS Working Papers 1079, Bank for International Settlements.
    5. Armstrong, Will J. & Cardella, Laura & Sabah, Nasim, 2021. "Information shocks, disagreement, and drift," Journal of Financial Economics, Elsevier, vol. 140(3), pages 916-940.
    6. Paul Fischer & Chongho Kim & Frank Zhou, 2022. "Disagreement about fundamentals: measurement and consequences," Review of Accounting Studies, Springer, vol. 27(4), pages 1423-1456, December.
    7. Da‐Hea Kim, 2022. "Investment horizon and option market activity," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 42(5), pages 923-958, May.
    8. Brooks, Chris & Chen, Zhong & Zeng, Yeqin, 2018. "Institutional cross-ownership and corporate strategy: The case of mergers and acquisitions," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 187-216.
    9. Ryan Flugum & Svetlana Orlova & Andrew Prevost & Li Sun, 2021. "Distracted institutions, information asymmetry and stock price stability," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 48(9-10), pages 2015-2048, October.
    10. Giovanni Cespa & Xavier Vives, 2011. "Expectations, Liquidity, and Short-term Trading," CESifo Working Paper Series 3390, CESifo.
    11. Giovanni Cespa & Xavier Vives, 2015. "The Beauty Contest and Short-Term Trading," Journal of Finance, American Finance Association, vol. 70(5), pages 2099-2154, October.
    12. Kang, Sanggyu & Chung, Chune Young & Kim, Dong-Soon, 2019. "The effect of institutional blockholders' short-termism on firm innovation: Evidence from the Korean market," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    13. Chen, Jason V., 2023. "The wisdom of crowds and the market's response to earnings news: Evidence using the geographic dispersion of investors," Journal of Accounting and Economics, Elsevier, vol. 75(2).
    14. Wang, Xiaoqiong & Wei, Siqi, 2021. "Does the investment horizon of institutional investors matter for stock liquidity?," International Review of Financial Analysis, Elsevier, vol. 74(C).
    15. Erhemjamts, Otgontsetseg & Huang, Kershen, 2019. "Institutional ownership horizon, corporate social responsibility and shareholder value," Journal of Business Research, Elsevier, vol. 105(C), pages 61-79.
    16. Banerjee, Snehal & Green, Brett, 2015. "Signal or noise? Uncertainty and learning about whether other traders are informed," Journal of Financial Economics, Elsevier, vol. 117(2), pages 398-423.
    17. Ramalingegowda, Santhosh & Yu, Yong, 2012. "Institutional ownership and conservatism," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 98-114.
    18. Doina C. Chichernea & Alex Petkevich & Blerina Bela Zykaj, 2015. "Idiosyncratic Volatility, Institutional Ownership, and Investment Horizon," European Financial Management, European Financial Management Association, vol. 21(4), pages 613-645, September.
    19. Paul Borochin & Jie Yang, 2016. "The Effects of Institutional Investor Objectives on Firm Valuation and Governance," Finance and Economics Discussion Series 2016-088, Board of Governors of the Federal Reserve System (U.S.).
    20. Martijn Cremers & Ankur Pareek & Zacharias Sautner, 2020. "Short-Term Investors, Long-Term Investments, and Firm Value: Evidence from Russell 2000 Index Inclusions," Management Science, INFORMS, vol. 66(10), pages 4535-4551, October.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:bla:finrev:v:57:y:2022:i:1:p:45-67. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Wiley Content Delivery (email available below). General contact details of provider: https://edirc.repec.org/data/efaaaea.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.