Trading Volume, Information Asymmetry, and Timing Information

This paper investigates trading volume before scheduled and unscheduled corporate announcements to explore how traders respond to private information. I show that cumulative trading volume decreases by more than 15% prior to scheduled announcements. The decline in trading volume is largest when information asymmetry is high, while the opposite relation holds for volume after the announcement. In contrast, trading volume before unscheduled announcements increases dramatically and shows little relation to proxies for information asymmetry. All the results for scheduled announcements are consistent with asymmetric information theories, where discretionary liquidity traders (DLTs) decrease volume when they know there is much adverse selection. However, DLTs do not seem to read information embedded in prices before unscheduled announcements. I further investigate the behavior of market makers and find that they act appropriately by increasing price sensitivity before all announcements. This implies that market makers extract timing information from their order books. JEL classification: G14