Does Trading Volume Increase or Decrease Prior to Earnings Announcements?

This paper reports two empirical regularities regarding trading volume prior to earnings announcements. The literature suggests that discretionary liquidity traders postpone their equity trading until firms publicly announce earnings due to high information asymmetry before anticipated information events. Our first finding is that pre-announcement trading volume increases for firms with high analyst coverage. Our second finding is that trading volume prior to bad news is lower than good news earnings announcements for firms with low analyst coverage. Our findings suggest that the intensity of analyst activity and the nature of mandatory earnings news jointly determine the direction and magnitude of pre-announcement trading volume. We contribute to the literature by showing that analysts' information discovery (temporarily pushed back trading demand) prior to earnings announcements may understate (overstate) the magnitude of a short-window trading volume reaction to earnings announcements as measures of information content for firms with high (low) analyst coverage.