Earnings Announcements, Analyst Forecasts, and Trading Volume

Abstract

Empirical evidence shows that a significant proportion of analysts

issue their forecasts at the time of an earnings announcement (Ivković

and Jegadeesh 2004). These forecasts are commonly regarded as analyst

interpretations of earnings news contained in the announcement (Schipper

1991). Although analytical studies suggest that market reaction to news

from earnings announcement could be affected by analysts interpretation

information (Kim and Verrecchia 1994, 1997), the vast majority of previous

research has ignored whether and how these analysts interpreting forecasts

affect the market reaction to the earnings announcements. Our empirical

results show that sensitivity of trading volume reaction to earnings

announcements is increasing in the number of announcement period

analyst forecasts. The sensitivity of trading volume reaction is greater

when there is small analyst forecast dispersion. We also find that stock

return sensitivity is also increasing with the number of analyst forecasts. In

general, our results suggests that analysts interpretation help disseminate

new information contained in earnings announcement to the market.