Institutional ownership, differential predisclosure precision and trading volume at announcement dates

This study examines the relation between ownership structure, as revealed by the percentage of outstanding shares held by institutional investors, and trading volume at earnings announcement dates. We find that volume response as a function of institutional ownership is quadratic with the quadratic curve that reaches a maximum at around 50% institutional ownership. When risk tolerances are identical across investor types such a relation is consistent with Kim and Verrecchia's (1991a) proposition that trading volume response to public announcements increases with the level of cross-investor variation in precision of private predisclosure information. (C) 1997 Elsevier Science B.V. All rights reserved.