An Empirical Analysis of the Effects of Online Trading on Stock Price and Trading Volume Reactions to Earnings Announcements*


  • *

    Accepted by Peter Clarkson. We thank Orie Barron, Pete Clarkson (the associate editor), Oliver Kim, S. P. Kothari, Gerry Lobo, Sam Tiras, Ro Verrecchia, Peter Wysocki, two anonymous reviewers, and workshop participants at SUNY Buffalo and Syracuse University for helpful comments. Anwer Ahmed and Richard Schneible Jr. gratefully acknowledge financial support from the Center for Creation and Management of Digital Ventures, School of Management, Syracuse University. Doug Stevens gratefully acknowledges funding through a summer research grant from the School of Management, Syracuse University. We thank First Call/Thomson Financial for providing us with the analyst data used in this study.


This study provides evidence regarding the effects of online trading on stock price and trading volume reactions to quarterly earnings announcements. We test for differences in stock price and volume reactions to quarterly earnings announcements between a period with a significant amount of online trading (1996-99) and a period without online trading (1992-95). We conjecture that online trading has increased the proportion of naive investors in the market. We predict that this will result in (1) a decrease in the average precision of investor information prior to earnings announcements leading to higher earnings response coefficients (ERCs), (2) an increase in differential interpretation of earnings leading to higher trading volume reactions that are unrelated to price change, and (3) a decrease in differential prior precision leading to a decrease in the association between trading volume and absolute price change. We find evidence consistent with all three predictions. Our findings are relevant for assessing the validity of concerns about online trading expressed by regulators and the validity of theoretical models of trade with asymmetrically informed investors.