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Differences of opinion, information and the timing of trades

  • Saffi, Pedro

    ()

    (IESE Business School)

This paper focuses on the impact that dispersion of opinions and asymmetric information have on turnover near releases of public information, using the probability of information-based trading (PIN) to proxy for information asymmetry and analysts' forecast dispersion for differences of opinion. For earnings announcements of US firms, I find that a one standard deviation increase in dispersion accelerates trading, reducing the difference between turnover around and before announcements by 8.50%. A similar increase in the PIN delays trading, raising the difference by 8.29%. These results help to explain why a large number of events have high turnover before earnings announcements relative to turnover after their release. Furthermore, the information contained in the time-series difference between trading around and before announcements helps to separate the impact of information asymmetry from the impact of proxies for differences of opinion. I also present a theoretical model in which agents who receive private information of heterogeneous quality trade a stock before and after observing a public signal. This public signal is interpreted differently across agents, leading to differences of opinion. I obtain closed-form solutions for expected aggregate volume and its derivatives with respect to these variables, showing that extending static models of asymmetric information is not enough to match the empirical findings.

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Paper provided by IESE Business School in its series IESE Research Papers with number D/747.

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Length: 51 pages
Date of creation: 25 Apr 2008
Date of revision:
Handle: RePEc:ebg:iesewp:d-0747
Contact details of provider: Postal: IESE Business School, Av Pearson 21, 08034 Barcelona, SPAIN
Web page: http://www.iese.edu/

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  1. Wang, Jiang, 1959- & He, Hua., 1994. "Differential information and dynamic behavior of stock trading volume," Working papers 3731-94., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Froot, Kenneth A., 1989. "Consistent Covariance Matrix Estimation with Cross-Sectional Dependence and Heteroskedasticity in Financial Data," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 24(03), pages 333-355, September.
  3. Karl B. Diether & Christopher J. Malloy & Anna Scherbina, 2002. "Differences of Opinion and the Cross Section of Stock Returns," Journal of Finance, American Finance Association, vol. 57(5), pages 2113-2141, October.
  4. Heckman, James, 2013. "Sample selection bias as a specification error," Applied Econometrics, Publishing House "SINERGIA PRESS", vol. 31(3), pages 129-137.
  5. Ajinkya, Bipin B. & Jain, Prem C., 1989. "The behavior of daily stock market trading volume," Journal of Accounting and Economics, Elsevier, vol. 11(4), pages 331-359, November.
  6. Townsend, Robert M, 1983. "Forecasting the Forecasts of Others," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 546-88, August.
  7. Joon Chae, 2005. "Trading Volume, Information Asymmetry, and Timing Information," Journal of Finance, American Finance Association, vol. 60(1), pages 413-442, 02.
  8. Verrecchia, Robert E., 2001. "Essays on disclosure," Journal of Accounting and Economics, Elsevier, vol. 32(1-3), pages 97-180, December.
  9. 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.
  10. Harrison Hong & Terence Lim & Jeremy C. Stein, 1998. "Bad News Travels Slowly: Size, Analyst Coverage and the Profitability of Momentum Strategies," NBER Working Papers 6553, National Bureau of Economic Research, Inc.
  11. Vega, Clara, 2006. "Stock price reaction to public and private information," Journal of Financial Economics, Elsevier, vol. 82(1), pages 103-133, October.
  12. Albert Wang, F., 1998. "Strategic trading, asymmetric information and heterogeneous prior beliefs," Journal of Financial Markets, Elsevier, vol. 1(3-4), pages 321-352, September.
  13. David Easley & Soeren Hvidkjaer & Maureen O'Hara, 2002. "Is Information Risk a Determinant of Asset Returns?," Journal of Finance, American Finance Association, vol. 57(5), pages 2185-2221, October.
  14. 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 831-72, August.
  15. Abarbanell, Jeffery S. & Lanen, William N. & Verrecchia, Robert E., 1995. "Analysts' forecasts as proxies for investor beliefs in empirical research," Journal of Accounting and Economics, Elsevier, vol. 20(1), pages 31-60, July.
  16. Timothy C. Johnson, 2004. "Forecast Dispersion and the Cross Section of Expected Returns," Journal of Finance, American Finance Association, vol. 59(5), pages 1957-1978, October.
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