DP14587 The Real Side of the High-Volume Return Premium

Author(s): Doron Israeli, Ron Kaniel, Suhas A. Sridharan
Publication Date: April 2020
Keyword(s): corporate investment, Financing cash flows, Investor recognition, trading volume
JEL(s): E22, G12, G14, M41
Programme Areas: Financial Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=14587

Prior literature demonstrates that an increased trading activity of a firm's stock is associated with abnormal future stock returns (the high-volume return premium) and interprets this phenomenon as evidence that increased visibility generates reductions in cost of capital. Motivated by this interpretation, we investigate whether increased trading activity entails changes in real corporate actions. We document a positive relation between abnormal trading volume, future investment expenditures, and financing cash flows. This positive relation is not subsumed by the arrival of investment-related news or other corporate disclosures, nor by subsequent earnings information, and is concentrated among firms with high financial constraints and firms with lower levels of investor recognition.