Working Paper: CEPR ID: DP14587
Authors: Doron Israeli; Ron Kaniel; Suhas A. Sridharan
Abstract: 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.
Keywords: trading volume; corporate investment; financing cash flows; investor recognition
JEL Codes: E22; G12; G14; M41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| increased visibility from trading volume (G10) | reduced costs of capital (G31) |
| abnormal trading volume (G14) | future investment expenditures (G31) |
| abnormal trading volume (G14) | future net financing cash flows (G32) |
| abnormal trading volume (G14) | greater capital raising activities (G24) |
| trading volume (G15) | investment (firms with high financial constraints) (G31) |
| trading volume (G15) | investment (firms with lower levels of investor recognition) (G24) |