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The Behavior of Small Traders around Earnings Announcements: An Empirical Evidence from Japan
Kazuhisa Otogawa, Kobe University
Hiromi Wakabayashi, Konan University
ABSTRACT. We investigate the behavior of small traders around earnings announcements. Our results indicate that small traders actively buy or sell stocks in reaction to good or bad news announcements. Economic intuition suggests that buyer- (seller-) initiated trades after releasing good (bad) news should significantly increase. We find the evidence consistent with this intuition. But there are also counter-intuitive results that seller- (buyer-) initiated trades significantly increase even when good (bad) news is announced. We then use order imbalance measure to examine whether buyer- or seller-initiated small trades are predominant around earnings announcements. Our findings show that just after good news announcements, seller-initiated small trades are more dominant than buyer-initiated ones. We also provide some evidence that just after bad news announcements, seller-initiated trades are preponderant. Thus, our results suggest that stock trading by small traders might not be always optimal.
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