Abstract
This study examines the empirical relationship between unusual trading volume and earnings surprises in China’s A-share market. We provide evidence that an unusually low trading volume can signify negative information about firm fundamentals. Moreover, unusual trading volumes could predict abnormal returns close to the earnings announcement date. The degree of, and changes in, divergence of opinion could explain this result. Our study provides an insight into China’s market, where short sales are strictly forbidden. We report a strong relationship that is quite different from that described in most studies on the United States market.
Highlights
Gervais et al (2001) examined the relationship between extreme trading activity and the evolution of stock prices
Increasing connections across world financial markets indicate the integration of stock market risks, which play a central role in international portfolio diversification (Marfatia 2017)
We investigated the relationship between an unusual trading volume and earnings surprises in China’s market, a market in which short-selling constraints are strictly enforced, and market efficiency is lower than that in developed countries
Summary
Gervais et al (2001) examined the relationship between extreme trading activity and the evolution of stock prices. In contrast to what has been observed in the United States, stocks with unusually high trading volume may experience lower returns, and those with unusually low trading volume may experience higher returns close to the earnings announcement date in China. The ability of an unusually high trading volume to predict higher return is similar in the stock markets of some developed countries, especially the United States. For unusually low trading volume, Diamond and Verrecchia (1987) argue that prohibiting traders from short-selling increases the time needed for the market price to adjust to private information, especially bad news. We present evidence that an unusually low trading volume predicts lower cash flow and a higher return, and an unusually high trading volume predicts a lower return, which is quite different from the relationship observed in markets in the United States and most developed countries.
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