Abstract
We examine a possible cause for the higher returns realized by stocks that experience high abnormal trading volume around earnings announcements. We find that this earnings announcement volume premium is concentrated in stocks with either large aggregate unrealized capital gains or large aggregate unrealized capital losses. A high volume minus low volume portfolio conditioned on the magnitude of capital gains overhang generates returns as high as 11% per year. These returns are significant and robust to conventional risk adjustments. Our finding suggests that the high returns accruing to high volume stocks are associated with selling pressure, which is independent of fundamentals, coming from a subset of investors who base their selling decisions on the magnitude of unrealized capital gains or losses. The patterns we document also suggest that the well known disposition effect may not hold for stocks with extreme unrealized capital losses and are consistent with recent theoretical and empirical research that shows extreme losses prompt selling.
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