Investors' opinion disagreement and abnormal trading around pre-earnings announcements

Abstract

We use textual analysis techniques to construct a direct measure of investor disagreement to explain the abnormal stock volume and return around earnings expectation announcement in China. We crawl scrape the most a popular Chinese stock forum for individuals' posts about their opinion on a stocks, and classify the posts with machine learning methods. We find that our measure is most correlated with return volatility and historical turnover. We then conduct an event study for abnormal stock volume around pre-earnings announcements, examining the cumulative abnormal turnover for sample groups with prior agreement or disagreement, and with a convergence or divergence of opinion. We find that given prior disagreement of opinion, both convergence and divergence of opinion causing more trading volume in the Chinese market. We also observe the sample group with a divergence of opinion has more cumulative abnormal return than the convergence group. However, this effect is found to be more profound in stocks with higher institutional ownership, which is believed to be correlated with a low short-sale constraint.