Price and Trading Volume Reaction Surrounding Earnings Announcements: A Closer Examination

Abstract

The process of dissemination and interpretation in securities markets is very complex and mostly unobservable. While changes in prices and the amount of trading that takes place at the market level provide evidence of processing, Verrecchia [1981] demonstrated that these are not sufficient to describe completely the dissemination of and its interpretation by investors. A descriptive study of price changes and trading volume, however, may still provide some insights into how investors react to information. This paper is an empirical investigation of price changes and trading volume during the days surrounding the announcement of quarterly and annual earnings in the Wall Street Journal (WSJ). In the original paper investigating trading volume and price changes surrounding earnings announcements, Beaver [1968] was primarily concerned with whether the annual earnings announcement had information content (i.e., led to changes in investors' assessments of the probability distribution of future returns). If there were any significant price changes and/or trading volume during the week of the announcement, then the annual earnings announcement was assumed to have had