Abstract
We investigate whether shocks to trading volume of a stock contain information about future corporate investment activity; an unexplored prediction of the link between the high-volume return premium and the Merton (1987) investor recognition hypothesis. Using a q-theory model of corporate investment as a framework, we document a positive relation between abnormal trading volume around earnings announcements and future investment expenditures. The relation persists across quarterly and annual horizons and, consistent with theory, is concentrated among firms with high financing constraints. We also find that shocks to trading volume serve as an important channel for facilitating the previously documented contemporaneous relation between investor recognition and corporate investments. Taken together, consistent with the idea that extreme trading activity of a stock is associated with an increase in firm visibility, our study suggests that shocks to trading volume play an important role in enhancing corporate investment activity.
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