Does Anticipated Information Impose a Cost on Risk-Averse Investors? A Test of the Hirshleifer Effect


  • Accepted by Haresh Sapra. This paper is based on my doctoral dissertation at the University of North Carolina at Chapel Hill. I thank my advisers Eric Ghysels, Wayne Landsman, Mark Lang, Doug Shackelford, and especially Robert Bushman and Ro Verrecchia for their continuous support and guidance on this project. This paper benefited from comments by an anonymous referee, Phil Berger, Hans Christensen, Thomas Hemmer, Terry Shevlin, and seminar participants at the University of Chicago, Columbia University, Harvard, London Business School, the University of Minnesota Empirical Conference, MIT, the University of North Carolina at Chapel Hill, Northwestern University, Purdue University, Stanford University, Tel Aviv University, the University of Texas at Austin, Wharton, and the AFAANZ Doctoral Colloquium in Melbourne, Australia. Financial support from the University of Michigan Ross School of Business, the University of Chicago Booth School of Business and the Neubaurer Family Faculty Fellowship are gratefully acknowledged.


This paper theoretically and empirically investigates how the risk of future adverse price changes created by the anticipated arrival of information influences risk-averse investors’ trading decisions in institutionally imperfect capital markets. Specifically, I examine how the selling activity of individual investors immediately following an earnings announcement is influenced by the tradeoff between risk-sharing benefits of immediate trade and explicit transaction costs imposed on such trades. Consistent with my theoretically derived predictions, I find that investors’ current trading decisions are less sensitive to the incremental transaction costs created by short-term capital gains taxes on trading profits, as both the duration and intensity of the risk of future adverse price changes increase. This evidence is consistent with an incremental cost to investors that results from the revelation of precise information, which is commonly referred to as the Hirshleifer Effect.