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The paper empirically investigates Kim and Verrecchia's (1991) theoretical proposition that trading volume reaction to public announcements is an increasing function of both the magnitude of the associated price reaction and the level of predisclosure information asymmetry among investors. In doing so, we utilize the fraction of institutional holdings of a firm's shares, in addition to the dispersion of analysts' earnings forecasts commonly used in the literature (e.g., Atiase and Bamber 1994), for testing the role of predisclosure information asymmetry. We find that the trading volume reaction to quarterly earnings announcements is significantly and positively related to predisclosure information asymmetry even after the associated price reaction and the dispersion of analysts' earnings forecasts are controlled for. Our findings suggest that the institutional holding variable better captures Kim and Verrecchia's predisclosure information asymmetry than the dispersion of analysts' earnings forecasts.
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Kim et al. (1998) studied this question.
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