Trading Volume and Investor Disagreement Around Management Forecast Disclosures

Abstract

We investigate the relationship between trading volume and investor disagreement over information before and from management forecast disclosures. Prior studies on trading volume usually focus on earnings announcements, which are mandatory and largely anticipated by investors, and report that trading volume around earnings announcements are significantly related to investor disagreement over information before and from the announcement. We use management earnings forecasts to test Kim and Verrecchia’s (1997) prediction that trading volume around an unanticipated information event reflects investors’ differential interpretation of information from the event relatively more than that of information available before the event. Consistent with the prediction, we find that trading volume around a management forecast is significantly related to belief jumbling, a proxy for investor disagreement over management forecast information, but not to analyst forecast dispersion before a management forecast, which is a proxy for investor disagreement over information available before the information event. Our findings are robust to the two-stage self-selection estimation and other sensitivity tests. We also find that the volume–jumbling relationship tends to be stronger for management forecasts with bad news or shorter forecast horizon. Finally, using earnings announcements subsequent to management forecast disclosures, we report results that suggest that management forecasts trigger preemptive information processing activities before the scheduled information events.