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Sidelined Investors, Trading-Generated News, and Security Returns

Author

Listed:
  • H. Henry Cao

    (University of North Carolina)

  • Joshua D. Coval

    (Harvard University)

  • David Hirshleifer

    (Ohio State University)

Abstract

This article studies information blockages and the asymmetric release of information in a security market with fixed setup costs of trading. In this setting, "sidelined" investors may delay trading until price movements validate their private signals. Trading thereby internally generates the arrival of further news to the market. This leads to (1) negative skewness following price run-ups and positive skewness following price rundowns (even though the model is ex ante symmetric), (2) a lack of correspondence between large price changes and the arrival of external information, and (3) increases in volatility following large price changes. Copyright 2002, Oxford University Press.

Suggested Citation

  • H. Henry Cao & Joshua D. Coval & David Hirshleifer, 2002. "Sidelined Investors, Trading-Generated News, and Security Returns," The Review of Financial Studies, Society for Financial Studies, vol. 15(2), pages 615-648, March.
    • Handle: RePEc:oup:rfinst:v:15:y:2002:i:2:p:615-648
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