Timing of accounting information disclosure and informed trading— An empirical study on the time gap between annual and 1st quarterly financial reports and extra abnormal trading volume

Abstract

Considering the cost of capital, systematic risk and the probability of being monitored and punished, informed traders are most likely to conduct informed trading at the small time gap between the disclosure of annual report of year t and 1st quarter reports of year t+1 because the gap is the best and safest time for informed trading. Meanwhile, due to the high cost and risks of informed trading, traders need huge trading volumes to gain abnormal returns. Based on these characteristics of informed trading, a research sample and a control sample are found for this paper. The former refers to companies with loss annual report in year t and profit-making 1st quarter financial report in year t+1 in tandem. The latter refers to companies announced loss in the previous year and profit-making 1st quarter financial report in year t+1 simultaneously or companies with loss annual report in the year t and loss 1st quarter financial report in year t+1 in tandem. Results confirm the existence of informed trading by measuring “extra abnormal trading volume”. Therefore, authors suggest that a good disclosure policy should not only consider the timeliness and accuracy of the financial reports, but also the overall information disclosure process to prevent potential informed trading.

Keywords

disclosure gap,informed trading,extra abnormal trading volume

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2009 Higher Education Press