Escape From The Market: Discretionary Liquidity Trading

Abstract

Using two types of corporate events, a scheduled announcement and

an unscheduled announcement, I investigate the effect of information

asymmetry on trading volume. Only before a scheduled announcement,

such as an earnings announcement, can I observe decreasing trading

volume. I construct a simple theoretical model that suggests how ex

ante information asymmetry and discretionary liquidity trading could

cause the decreasing trading volume only before a scheduled

announcement. Finally, analyzing the relationship between this

decreasing trading volume and proxies of ex ante information

asymmetry, such as analyst coverage, size, and industry categorization,

I test and confirm an information asymmetry hypothesis about the

trading volume pattern before a scheduled announcement.