The Effect of Market Uncertainty on Abnormal Trading Volume Surrounding Quarterly Earnings Announcements: Moderating Roles of Firm Size and Market-Level Information

Document Type : Research Paper

Authors

1 Assistant Prof., Department of Accounting, Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran.

2 MSc., Department of Accounting, Faculty of Administrative Sciences and Economics, University of Isfahan, Isfahan, Iran.

10.22059/frj.2025.382435.1007644

Abstract

Objective
Investor reactions to market news are often reflected in changes in trading volume or stock prices. Earnings announcements typically result in abnormal trading volumes, as they provide new information about a company’s financial performance. Market uncertainty is another key factor that can influence trading activity during the earnings announcement window. Under uncertain conditions, investors may question the sustainability of a firm’s cash flows and overall profitability, leading to more cautious or reactive trading behavior. This research aims to investigate the impact of high market uncertainty on abnormal trading volumes during the earnings announcement window, considering the moderating roles of market-level information and firm size.
 
Methods
To address the research objectives, three hypotheses were formulated. These hypotheses were designed to explore the impact of high market uncertainty on abnormal trading volumes during the earnings announcement window, considering the moderating roles of market-level information and firm size. Panel data and regression analysis were employed using Eviews12 software for data analysis and hypothesis testing. The statistical sample comprised 127 companies listed on the Tehran Stock Exchange from 2013 to 2022.
 
Results
The results of the first hypothesis test indicate that market uncertainty has a positive and significant effect on abnormal trading volumes during the earnings announcement window. Specifically, under conditions of high market uncertainty, earnings announcements lead to increased abnormal trading activity. However, the results of the second hypothesis test show that market uncertainty does not have a significant effect on abnormal trading volumes in either small or large firms during the earnings announcement period. Contrary to expectations, the third hypothesis test results show that, under high market uncertainty, the abnormal trading volumes during the earnings announcement window are not greater in companies with higher market-level information compared to those with lower market-level information.
 
Conclusion
The findings indicate that under conditions of high market uncertainty, earnings announcements prompt investors to reassess future cash flow expectations, leading to increased abnormal trading volumes. Furthermore, firm size does not appear to moderate the impact of market uncertainty on abnormal trading activity. This may be because market uncertainty affects transaction volumes uniformly across firms. For example, during periods of elevated uncertainty, both small and large firms may experience similar levels of abnormal trading, driven more by overall market sentiment than by firm-specific factors. Also, this phenomenon may be attributed to behavioral biases or other limiting factors. In companies with low market-level information, high market uncertainty significantly increases abnormal transaction volumes. However, in companies with high market-level information, no significant effect is observed. This may be because companies with high market-level information have multiple information sources that reach the market before earnings announcements, rendering the announcements less impactful. Conversely, in companies with low market-level information, earnings announcements under high market uncertainty provide new information that updates expectations and alters trading volumes during the earnings announcement window.

Keywords

Main Subjects

References

 
Abbasi, E., Dehghan nayeri, L. & Poordadash Mehrabani, N. (2016). Surveying the Relation among Volume, Stock Return and Return Volatility in the Tehran Stock Exchange: A Wavelet Analysis. Journal of Asset Management and Financing, 4(4), 99-114.
(in Persian)
Ahamdi, M. & Rajabi, M. (2021). The relationship between the volume and number of transactions on the volatility of stock returns. 1th National Conference on Management & E-Commerce, 1-13. (in Persian)
Albuquerque, R., De Francisco, E. & Marques, L. B. (2008). Market wide private information in stocks: Forecasting currency returns. The Journal of Finance, 63(5), 2297-2343.
Bahaghighat, E. & Rezaei, F. (2018). The effect of Earning Response Coefficient on the Relationship between Stock Returns Synchronicity with firms Abnormal Return and Abnormal Volume. Journal of Management Accounting and Auditing Knowledge, 7(26), 43-56. (in Persian)
Bahrololoum, M. M., Peymany Foroushany, M. & Rezaveisi, M. (2022). The Impact of Individual Investor's Trading on Firm Value of Listed Companies in Capital Market. Financial Management Strategy, 10(3), 27-42. (in Persian)
Ball, R. & P. Brown. (1968). An empirical evaluation of accounting income numbers. Journal of Accounting Research, 6(2), 159-178.
Ball, R. & Foster, G. (1982). Corporate financial reporting: A methodological review of empirical research. Journal of Accounting Research, 20, 161-248.
Ball, R., Sadka, G. & Sadka, R. (2009). Aggregate earnings and asset prices. Journal of Accounting Research, 47(5), 1097-1133.
Bamber, L. S., Barron, O. E. & Stevens, D. E. (2011). Trading volume around earnings announcements and other financial reports: Theory, research design, empirical evidence, and directions for future research. Contemporary Accounting Research, 28(2), 431-471
Bamber, L. S., Christensen, T. E. & Gaver, K. M. (2000). Do We Really ‘Know’ What We Think We Know? A Case Study of Seminal Research and Its Subsequent Overgeneralization. Accounting, Organizations and Society, 25(2). 103-129.
Bamber, L.S. (1987). Unexpected earnings, firm size, and trading volume around quarterly earnings announcements. The Accounting Review, 62, 510-532.
Barron, O.E, Schneible, R.A. & Stevens, D.E. (2018). The Changing Behavior of Trading Volume Reactions to Earnings Announcements: Evidence of the Increasing Use of Accounting Earnings News by Investors. Contemporary Accounting Research, 35(4), 1651-1674.
Beaver, W. H. (1968). The Information Content of Annual Earnings Announcements. Journal of Accounting Research, 67-92.
Beytari, J. & Panahian, H. (2019). Providing a model of trading volume relationships, transaction value with stock returns and price bubbles in different industries of Tehran Stock Exchange by using COPPOLA functions and GARCH models. Financial Engineering and Securities Management, 10(39), 26-53. (in Persian)
Bhattacharya, N. (2001). Investors' trade size and trading responses around earnings announcements: An empirical investigation. The Accounting Review, 76(2), 221-244.
Bird, R. & Yeung, D. (2012). How do investors react under uncertainty? Pacific-Basin Finance Journal, 20, 310-327.
Bonsall, S. B., Bozanic, Z. & Fischer, P. E. (2013). What do management earnings forecasts convey about the macroeconomy? Journal of Accounting Research, 51(2), 225-266.
Bonsall, S. B., Green, J. & Muller III, K. A. (2020). Market uncertainty and the importance of media coverage at earnings announcements. Journal of Accounting and Economics, 69(1), 101264.
Brown, P., Kleidon, A. W. & Marsh, T. A. (1983). New Evidence of Nature of Size-related Anomalies in Stock Prices. Journal of Financial Economics, 12, 105-127.
Chenari, H. & Banimahd, B. (2022). Conceptual explanation of the impact of trading volume on earnings announcements. Judgment and decision-making in accounting, 1(1), 19-45.
 (in Persian)
Choi, H. M. (2018). A tale of two uncertainties. Journal of Banking & Finance, 92, 81-99.
Choi, H. M. (2019). Market uncertainty and trading volume around earnings announcements. Finance Research Letters, 30, 14-22.
Conrad, J., Cornell, B. & Landsman, W. (2002). When is bad news really bad news? Journal of Finance, 6, 2507–2532.
Diamond, D. & Verrecchia, R. (1991). Disclosure, Liquidity, and the Cost of Capital. The Journal of Finance, 46(4), 1325-1359.
Dogan, M. (2013). Does firm size affect the firm profitability? Evidence from Turkey. Research Journal of Finance and Accounting, l4, 53-59.
Du, D., Denning, K. & Zhao, X. (2011). Evidence on stock reaction to market-wide information. Review of Pacific Basin Financial Markets and Policies, 14(02), 297-325.
Forooghi, D. & Mehrdad Ayask, S. S. (2015). Market Reaction to the Timing of EPS Forecast. Empirical Research in Accounting, 5(3), 139-162. (in Persian)
Frankel, R., Kothari, S. P. & Weber, J. (2006). Determinants of the informativeness of analyst research. Journal of Accounting and Economics, 41(1-2), 29-54.
Gaunt, C. (2004). Size & Book-to-market Effects & the Fama & Fresh Three Factor Asset Pricing Model: Evidence from the Australian Stock Market. Journal of Accounting & Finance, 44, 27-44.
Hamidian, N., Arabsalehi, M. & Amiri, H. (2020). Analysis of Investors’ Reaction to Unexpected Earnings Under Market Uncertainty. Journal of Asset Management and Financing, 8(1), 41-56. (in Persian)
He, W., Jackson, A. & Liang, K. (2019). Inconsistent Signals, Earnings Announcements and Market Uncertainty. Journal of Accounting, Finance and Business Studies, 55(2), 411-435.
Jansen, I. P. & Nikiforov, A. (2022). Intertemporal variation in abnormal volume around earnings announcements: “Distraction” or “flocking-and-dispersing”? Economics Letters, 218, 110722.
Johnson, W. & Zhao, R. (2012). Contrarian Share Price Reactions to Earnings Surprises. Journal of Accounting, Auditing & Finance, 27(2), 1-47.
Kashi, M., Roshan, R. & Donyaei, M. (2013). Investigating the causal and simultaneous relationship between stock returns, trading volume and return volatility on the Tehran Stock Exchange: An application of multiple models. Financial Engineering and Securities Management, 4(17), 61-84. (in Persian)
Knight, F. H. (1921). Risk, uncertainty, and profit. Boston, MA: Hart, Scha_ner & Marx; Houghton Mifflin Company.
Landsman, W. R., Maydew, E. L. & Thornock, J.R. (2012). The information content of annual earnings announcements and mandatory adoption of IFRS. Journal of Accounting and Economics, 53(1-2), 34-54.
Levi, S. & Zhang, X. J. (2015). Asymmetric decrease in liquidity trading before earnings announcements and the announcement return premium. Journal of Financial Economics, 118(2), 383-398.
Li, X. & Hou, K. (2024). Investors' opinion disagreement and abnormal trading around pre-earnings announcements. International Review of Financial Analysis, 91, 103035.
Mashayekh, S. & Akbari, F. (2017). Effects of Information Risk and Transaction Costs on Market Reaction to Earnings Announcement. Empirical Research in Accounting, 7(1), 131-151. (in Persian)
Miller, D. & Shamsie, J. (1999). Strategic responses to three kinds of uncertainty: Product line simplicity at the Hollywood film studios. Journal of Management, 25(1), 97-116.
Milliken, F. J. (1987). Three types of perceived uncertainty about the environment: State, effect, and response uncertainty. Academy of Management review, 12(1), 133-143.
Osoolian, M. & Bazchi, M. (2019). Behavioral Bias, Abnormal Volume, and Abnormal Return. Journal of Asset Management and Financing, 7(4), 81-96. (in Persian)
Pak, D. & Choi, S.Y. (2022). Economic Policy Uncertainty and Sectoral Trading Volume in the U.S. Stock Market: Evidence from the COVID-19 Crisis. Complexity, Article ID 2248731, 1-15.
Pastor, L. & Veronesi, P. (2009). Learning in financial markets. Annual Review of Financial Economics, 1(1), 361-381.
Pastor, L. & Stambaugh, R., (2003). “Liquidity risk and expected stock returns”, Journal of Political Economy, 111, 642– 685.
Ramazani Zare, M. H., Arabzadeh, M., Namaki, A. & Alipour, M. (2023). Investigating the Factors Governing the Informativeness of Stock Prices Using the DEMATEL Approach. Financial Research Journal, 25(2), 343-368. (in Persian)
Ramshe, M., Izadinia, N. & Yadegari, S. (2012). Forecasting the direction of stock return changes based on trading volume using the Probit model for companies listed on the Tehran Stock Exchange. Journal of Accounting and Social Interests, 4(4), 119-133.
(in Persian)
Shoorvarzy, M. & Pahlavan, R. (2010). The effect of Firm Size on Earnings smoothing. Management Researches, 87, 69-80. (in Persian)
Sistani, Y., Kia, B., Ahmadi, A. & Rabie, K. (2023). Investigating the effect of volume shock on abnormal stock returns of companies listed on the Tehran Stock Exchange. Islamic Economic & Banking, 11 (41), 229-251. (in Persian)
Slovik, P. (2010). Market uncertainty and market instability. IFC Bulletin, 34.
Talaneh, A. R., Mahmoodi, M. & Sharafy, K. (2013). The Informational Content of Abnormal Trading Volume of Shares Listed at Tehran Stock Exchange. Financial Research Journal, 15(1), 1-16. (in Persian)
Wen, W. & Feng, X. (2023). Multiple large shareholders and abnormal stock trading halts. China Journal of Accounting Studies, 11(4), 795-825.
Williams, Ch. D. (2015). Asymmetric responses to earnings news: a case for ambiguity. The Accounting Review, 90(2), 785-817.
Financial Research Journal
Volume 27, Issue 3
2025
Pages 632-659

Files

Share

How to cite

Statistics