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The impact of public information on investors

John R. Nofsinger
*
Department of Finance, Marquette University, Milwaukee, WI 53201-1881, USA
Received 2 September 1999; accepted 25 May 2000
Abstract
This study investigates the trading behavior of institutional and individual investors
around both rm-specic news releases in the Wall Street Journal and macro-economic
announcements. For the rm-specic news releases we nd that investors conduct a high
degree of trading around news releases, especially earnings and dividend news. Insti-
tutions buy and sell on both good and bad news, while individual investors only trade
on good news. The length of the news article (visibility) is also an important attribute to
motivate individual investor trading. Lastly, both institutions and individuals buy large
rms after good economic news and sell large rms after bad economic news. The
trading of small rms does not appear to be motivated by macro-news. 2001 Elsevier
Science B.V. All rights reserved.
JEL classication: G14
Keywords: Institutional investors; Individual investors; News releases; Macro-economic
announcements
1. Introduction
In this paper, we investigate the trading behavior of institutional and indi-
vidual investors around news releases. In general, we seek to discover what
types of news releases cause investors to buy and/or sell stock. Moreover, we
Journal of Banking & Finance 25 (2001) 13391366
www.elsevier.com/locate/econbase
*
Tel.: +1-414-288-1442.
E-mail address: nofsinger@biz.mu.edu (J.R. Nofsinger).
0378-4266/01/$ - see front matter 2001 Elsevier Science B.V. All rights reserved.
PII: S 0 3 7 8 - 4 2 6 6 ( 0 0 ) 0 0 1 3 3 - 3
test for dierences in trading behavior between institutional investors and in-
dividual investors. The link between information and price changes is an im-
portant tenet of market eciency. Therefore, the reaction of investors to public
information releases can provide new insights into market eciency and price
discovery, as it is the trading of these market participants that move prices to
new equilibrium.
The trading behavior of dierent groups of investors has recently become an
important factor in the study of market micro-structure and investments.
Modern trading models, for example, usually include at least two types of
investors who have dierent motivations to trade (see De Long et al., 1990;
Kim and Verrecchia, 1994; Trueman, 1988). The behavior of dierent types of
investors has been studied empirically in the context of the size and book-to-
market eects (Del Guercio, 1996), the turn of the year eect (Sias and Starks,
1997a), and return autocorrelations (Sias and Starks, 1997b). As the behavior
of investors has become more important in studies of the markets, several
studies have investigated the trading behavior of institutional investors and the
price impact of those trades (see, for example, Chan and Lakonishok, 1993;
Keim and Madhavan, 1995; Lakonishok et al., 1992). We contribute to this
line of research by, rst, investigating the trading behavior of institutional and
individual investors around rm-specic news releases. Specically, we test the
abnormal trading volume by investor type. We seek to learn which types of
news (topics, good versus bad, visibility, etc.) motivate investors to buy, sell
and trade. Secondly, we investigate the trading behavior around macro-eco-
nomic announcements. This analysis includes tests of the lead/lag relationship
between large and small rms.
We nd that institutions engage in high abnormal buy and sell volume
around both good and bad rm-specic news releases. Individual investors,
however, experience high abnormal trading only around good news. Individual
investors are also aected by the visibility of the news publication whereas this
is not a factor for institutions. Earnings news is the most important topic for
motivating trading, while dividends and capital budgeting news are also im-
portant.
We also test the asymmetric trading response hypothesis of McQueen et al.
(1996). They propose that investors react quickly to bad news by selling all
types of rms, but react quickly to good news in only the large rms. The
delayed reaction for buying small rms on good news causes the correlation
between small rm returns and lagged large rm returns. Our tests suggest that
investors do indeed react quickly to good news by buying large rms and not
small rms. However, these results occur in both good and bad macro-eco-
nomic announcements, which is not consistent with the hypothesis.
Investor trading behavior theories, as they relate to news releases, are re-
viewed in the following section. The Wall Street Journal (WSJ) Index is used to
identify all rm-specic news published during the sample period for the 144
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rms in the Torq dataset. We describe the data in detail in Section 3. Section 4
derives the measures of abnormal buy and sell trading for institutions and
individual investors. The tests are reported and discussed in Section 5. Lastly,
in Section 6 we discuss the trading that results on days when macro-economic
announcements are made and conclude our study in Section 7.
2. Investor trading behavior
Both academics and practitioners are interested in how dierent types of
investors behave and how this behavior impacts prices, volatility, and market
micro-structure factors. The trading behavior of dierent groups of investors
has also recently become an important factor in the study of market anomalies.
A variety of theories exist that attempt to identify the cause of investor be-
havior, each theory predicting dierent reactions of investors to news: (1)
traditionally, researchers have thought that investors have been motivated by
the axioms of expected utility theory;
1
(2) in other theories, market partici-
pants are motivated by the dynamics of agency relationships with clients;
2
and
(3) some theories predict that investors seek to reduce their internal conict, or
cognitive dissonance, in ways not normally associated with utility theory or
agency theory.
3
Investor reaction has recently been used to explain various pricing anoma-
lies. Take, for example, the overreaction hypothesis by DeBondt and Thaler
(1985) which tries to explain the long-term mean reversion in stock prices.
Chopra et al. (1992) study the pattern and nd the strongest results in small
stocks. They conclude that since individuals are the dominant investors in
small stocks, we can conclude that they are more susceptible to overreaction.
There is also evidence of underreaction to news. Bernard and Thomas (1990)
and others have identied an underreaction to earnings news surprises. That is,
a positive earnings surprise is followed by positive abnormal returns for several
months. Lee (1992) studies the reaction of investors to earnings news by sep-
arating trades by share size. Abnormally high large trades (presumably by
institutions) occur around earnings announcement, while abnormally high
small trade buying (presumably by individuals) occurs for a period after the
1
These investors enter trading models as information traders and arbitrageurs, see Hirshleifer et
al. (1994).
2
These theories lead to behaviors such as ``prudent'' investing (Del Guercio, 1996), noise trading
(Trueman, 1988), herding (Scharfstein and Stein, 1990), and window dressing (Ritter and Chopra,
1989).
3
These theories lead to overreaction (DeBondt and Thaler, 1985), fads (Shiller, 1984), noise
traders (De Long et al., 1990), prospect theory (Kahneman and Tversky, 1979), and the disposition
eect (Shefrin and Statman, 1985).
J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366 1341
announcement. Lees results suggest that individuals react more slowly to news
announcements than do institutional investors. Hong and Stein (1999) present
a theory of investor behavior that attempts to unify the observed underreac-
tion, momentum, and overreaction in the stock market. In a test of the model,
Hong et al. (2000) conclude that negative rm-specic information travels
slowly across the investing public.
Additionally, McQueen et al. (1996) study the lead/lag relationship between
the returns of large stocks and small stocks. They conclude that institutional
investors sell all stocks quickly when news is bad and buy only large stocks
quickly when news is good, however, they delay buying small stocks on good
news. Finally, Abraham and Ikenberry (1994) conclude that the ``week-end
eect'' is a manifestation of individual investors trading on Monday based on
news they received on Friday. This delayed reaction to news, especially bad
news, causes the lower returns on Monday.
Note that many studies infer the trading behavior of various types of in-
vestors by using trade size or institutional ownership as a proxy (see, for ex-
ample, Nofsinger and Sias, 1999). Few studies, however, report the trading
behavior of investors by studying their actual trades. Notable exceptions are
Chan and Lakonishok (1993) and Keim and Madhavan (1995) who investigate
institutional trading, and Odean (1998) who investigates individual investor
trades.
3. Data
3.1. The Torq dataset
The Torq dataset consists of all transactions for 144 randomly selected New
York Stock Exchange stocks from 1 November 1990 to 31 January 1991.
4
Unlike most transactions data, the Torq data provides an ``audit trail'' of each
transaction that identies the type of order (e.g., market, limit, ITS) and the
buyer(s) and/or seller(s) as an institutional or individual investor. The audit
trail consists of approximately 1.78 million NYSE trade participant records.
We limit our analysis to those records that identify both the trader-type and the
order-type. Note that each trade consists of a minimum of two trade partici-
pant records (i.e., at least one buyer and one seller), but can consist of multiple
buyers and/or multiple sellers (e.g., a 500 share market buy order is matched
4
The NYSE randomly selected the rms. To select the rms, the NYSE rst sorted all the rms
by capitalization into 10 groups. Then they randomly selected 15 rms from each of the 10 groups
for a total of 150 rms. By the time they set up the mechanisms for collecting the specialized data,
six of the selected rms were not longer trading on the NYSE.
1342 J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366
with a 400 share limit sell order and 100 shares sold by the specialist). Spe-
cically, we obtain the trader type, order type and volume of shares for each
side (buy or sell) of each trade from the audit trail. To study how investor
trading is motivated by news releases, we limit the data by only using the
volume of shares from market orders. We are left with approximately 921,400
trade participant records.
3.2. Firm-specic news releases
The Wall Street Journal Index was used to identify news articles about each
rm in the Torq dataset during the period 1 November 1990 through 31
January 1991. Each news release was classied by the topic of the article. The
four subject classications consist of news about earnings, dividends, capital
budgeting, and other news.
5
Examples of these classications are shown in
Panel A of Appendix A table. Additionally, the length of the article was re-
corded as small, medium, or large according to the designation in the WSJ
Index.
In all, 561 articles were identied. However, this study uses a three-day event
window to examine the trading activity induced by the news release, thus the
articles on the rst and last days of the sample period are not used. Addi-
tionally, more than one type of news article for a rm may appear on one day.
The result is a sample of 465 rm-day news releases discussing 120 rms.
6
Because of the uniqueness of the data, we include several descriptive tables
before testing our hypotheses.
Table 1 shows the distribution of WSJ news articles for the sample rms.
The 465 news release-days were represented by 355, 127, and 25 short, medium
and long articles, respectively. The largest specic classication of articles fo-
cused on capital budgeting issues (147 articles), followed by earnings (106), and
then dividend news (102) was ranked next. The other news classication in-
cludes 166 stories related to securities, management, and industry.
7
The large
articles seem to be clustered in the capital budgeting (17) category. The table
also presents the number of rm-specic articles released by company capi-
talization quintiles. The smallest four quintiles range from 33 to 65 articles
5
The Other News category was originally broken down into the ve categories: the rms
securities, business operations, management, reorganization, and industry. However, the initial
exploratory investigation indicated that these topics did not motivate investors to trade at more
than normal levels.
6
The three-day event window also causes some observations to overlap. Because of the small
dataset, overlapping observations are kept in the analysis.
7
In several instances, more than one article was published during a day in the WSJ for a rm.
This causes the summation of news topics to be greater than the 465 news/days.
J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366 1343
during the sample period. The largest quintile of rms experienced 229 news
releases.
8
This large dierence may be attributed to the editorial process by
which the Wall Street Journal selects news to publish.
As for the calendar distribution of the news articles, the table shows the total
number of articles published for each day of the week and for each of the three
months. There are 13 days in the sample for each weekday, except Tuesday
where there is only eleven days. The number of articles for each day is very
similar for Monday through Thursday (range 8193). The number increases to
120 on Fridays. This is consistent with the end-of-the-week bias found by
Thompson et al. (1987), although Mitchell and Mulherin (1994) nd the largest
number of news releases to be on Mondays. The dierence between Friday and
the rest of the week seems to be concentrated in the small articles. The number
8
As discussed in the next section, there are ve rms in the sample without capitalization values.
These ve rms have 39 articles published during the sample period.
Table 1
Distribution of WSJ news articles for sample rms
Length of WSJ news article
Total Short Medium Long
All news articles 465 355 127 25
News topic
Earnings 106 102 11 1
Dividend 102 100 3 0
Capital budgeting 147 109 52 17
Other news 166 93 86 9
By rm size
Quintile 1 (smallest) 43 41 3 0
Quintile 2 33 31 3 0
Quintile 3 65 57 7 1
Quintile 4 56 46 11 0
Quintile 5 (largest) 229 155 91 20
By day of the week
Monday 87 62 24 8
Tuesday 81 60 21 5
Wednesday 93 76 22 3
Thursday 84 62 26 5
Friday 120 95 34 4
By month
November 169 146 42 12
December 128 94 39 7
January 168 131 46 6
1344 J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366
of articles published during each month is 169, 128, and 168 for November,
December, and January, respectively. The smaller number in December is
consistent with Thompson et al. (1987).
3.3. Daily returns and capitalization
Daily returns are obtained from the daily return tapes of the Center for
Research in Security Prices (CRSP). In order to determine whether the news
release was good news, bad news, or neutral news for the rm, we calculate an
abnormal daily return. The abnormal return is the rms return less the equally
weighted market return of all NYSE rms. A market capitalization for each
rm in the sample is calculated using the end of 1990 data from CRSP. Using
the NYSE capitalization break points, rms were ranked into size quintiles.
Since the rms selected to be in the Torq dataset were randomly selected from
each size decile, an equal number of rms appear in each size-ranked portfolio.
CRSP does not report capitalization for American Depository Receipts, af-
fecting four rms in the sample. Additionally, one rm is delisted in December
and has no year-end data. Analysis using size quintile portfolios or size as a
regressor does not include these ve rms. This aects 39 rm/day news re-
leases.
4. Methods
4.1. Aggregating transactions
In order to capture the trading behavior of all (or most) investors motivated
to trade because of a particular news release, we aggregate the transaction
volume data to full day volume. This is done by simply adding all a rms
shares traded during the day for a specic category of investor and trade type.
For example, each transaction identies the traders on each side of the trade.
Each day, all the rms shares purchased by individual investors are summed
and recorded. This process is also done for institutions buying and selling each
day. The daily volume of individual buying and selling and the total shares
traded for the day are also recorded. These daily volumes are used in the
following section to estimate abnormal trading measures.
4.2. Abnormal trading
As the purpose of this study is to investigate how investors react to news
releases, we develop a measure of abnormal trading. Specically, we wish to
determine whether institutional and individual investors are motivated to buy
or sell shares more than usual because of the news releases. We calculate an
J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366 1345
abnormal trading measure for both general trading by institutions and indi-
vidual investors and specic measures of: (1) individual buying, (2) individual
selling, (3) institutional buying, and (4) institutional selling.
We rst develop the general abnormal individual trading measure.
The standardized individual trading volume for a rm on any given day is
dened as
Ind Vol
i;t
=
Ind Shares
i;t
(1=63)
P
63
t=1
Ind Shares
i;t
; (1)
where Ind_Shares
i;t
denotes the total shares of rm i purchased and sold by
individual investors during day t. Note that the standardized individual trading
volume for a rm is simply the number of shares purchased and sold by in-
dividual investors during the day divided by the (time-series) average number
of shares individuals purchased and sold over the 63 trading days of the sample
period.
If there were no systematic patterns in trading volume during the week,
then we would expect the standardized trading volume measure of Eq. (1) to
be equal to one, on average. The day of the week pattern in news releases,
reported in Table 1, raises the possibility that investors trading may sys-
tematically dier between days. In Panel A of Table 2, we report the average
total standardized volume, and the volume of institutions and individuals, for
each day of the week. The reported t-statistics test for a dierence between
the estimate and one. On average, there is signicantly (at the 1% level) less
volume on Monday and more volume on Thursday than expected. These
results are similar to those of Mitchell and Mulherin (1994). Institutions
appear to trade more at the end of the week than at the beginning. Monday
and Tuesday have low volume while Thursday and Friday have high insti-
tutional volume. This trading behavior is consistent with the trading on in-
formation hypothesis. Note that we report more news stories were published
in the WSJ on Friday than on the other days of the week. Many of these
stories were, undoubtedly, rst reported on the Broadtape on Thursday. So
the high trading by institutions at the end of the week could be information-
based trading. The trading pattern for individual investors is somewhat
dierent. Individuals trade less often on Tuesdays and more often on
Thursdays. The reported F-statistic tests for the dierence in volume across
days of the week. All three standardized volumes have signicantly dierent
averages across the week at the 1% level.
Panel B of the table separately reports the average buy and sell standardized
volume for institutions and individuals. The pattern for institutional buying is
similar to total institutional volume reported in Panel A. That is, institutions
conduct fewer purchases than usual on Monday and Tuesday and relatively
more purchases on Thursday and Friday. Institutional sales, however, show
1346 J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366
signicant dierences only on Monday (fewer sales) and Friday (more sales).
Individual investors appear to make fewer purchases at the beginning of the
week (Monday and Tuesday) and more purchases on Thursday. For individual
sales, only Friday, which has more volume, deviates from the expected value.
Again, the F-statistics report that, in all cases, trading signicantly diers
across days of the week.
We now formally dene abnormal trading as
Abnormal Ind Trading
i;t
= Ind Vol
i;t
E Ind Vol
i;t

; (2)
where the expected standardized individual trading volume must account for
macro-economic news releases (see Chang et al., 1998), dierences in day-of-
the-week volume, and information ow eects (see Berry and Howe, 1994).
Our proxy for this expected value is the (cross-sectional) average of the stan-
dardized individual trading volume for all 144 rms in the sample for the day,
given by
E Ind Vol
i;t

=
1
144
X
144
i=1
Ind Vol
i;t
: (3)
Table 2
Day-of-the-week patterns in investor trading
a
Monday Tuesday Wednesday Thursday Friday F-statistic
Panel A: Standardized volume
Total volume 0.886 0.938 0.992 1.150 1.025 6.32
++
()3.20)
++
()1.57) ()0.18) (3.34)
++
(0.67)
Institutional
volume
0.906 0.891 0.945 1.121 1.121 4.88
++
()1.97)
+
()2.73)
++
()0.95) (2.32)
+
(2.12)
+
Individual
volume
0.935 0.880 0.953 1.265 0.949 11.10
++
()1.50) ()3.16)
++
()1.02) (4.50)
++
()1.33)
Panel B: Standardized buy and sell volume
Institutional
Buy 0.871 0.834 0.958 1.185 1.127 6.18
++
()2.56)
+
()3.61)
++
()0.54) (2.85)
++
(2.09)
+
Sell 0.879 0.963 0.950 1.067 1.135 2.99
+
()2.13)
+
()0.69) ()0.85) (1.20) (1.96)
+
Individual
Buy 0.841 0.841 0.943 1.426 0.925 15.36
++
()2.77)
++
()3.28)
++
()1.01) (4.72)
++
()1.55)
Sell 1.033 0.963 0.950 1.067 1.135 3.06
+
(0.68) ()0.69) ()0.85) (1.20) (1.96)
+
a
The reported t-statistics (in parentheses) test for signicant deviations from one.
**
Statistical signicance at the 1% level.
*
Statistical signicance at the 5% level.
J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366 1347
Substituting Eqs. (3) and (1) in Eq. (2) gives the abnormal individual trading
measure
Abnormal Ind Trading
i;t
=
Ind Shares
i;t
(1=63)
P
63
t=1
Ind Shares
i;t

1
144
X
144
i=1
Ind Shares
i;t
(1=63)
P
63
t=1
Ind Shares
i;t
( )
: (4)
The intuition for this measure is as follows. We wish to investigate the
amount of trading that is inspired by a rm specic news release. Each rm in
the sample has a dierent level of ``normal'' trading activity; Eq. (1) simply
standardizes the volume for each rm. If the standardized individual trading
volume for a rm on any given day is greater than one, then the rm experi-
enced higher than normal volume. A value of less than one indicates that lower
trading volume than usual occurred. However, ``normal'' trading volume is
conditional on the day of the week. In addition, some days will have high
volume because of a specic macro-economic news release, which eects all
rms. Eqs. (2) and (3) adjust the trading volume measure for these cross-sec-
tional aects. Therefore, the abnormal individual trading measure of Eq. (4)
has an expected value of zero during any given day for any given rm. If de-
viations occur during the day when rm specic news is released, a positive
(negative) value is assumed to indicate higher (lower) volume than expected
and is attributed to the news.
The previous discussion deals with the calculation of abnormal individual
trading volume. The abnormal institutional trading volume is calculated in the
same manner. The dierence is that the number of institutional shares bought
and sold is used instead of the shares traded by individuals. Also of interest are
separate measures of buying volume and selling volume (see Lee, 1992).
Consequently, abnormal trading measures for institutional-buying, institu-
tional-selling, individual-buying, and individual-selling are calculated for each
rm on every day. In order to determine the buying behavior of individuals
responding to earnings announcements, we simply average the abnormal in-
dividual-buy measure over all earnings announcements in the sample.
A positive individual-buy measure indicates that individual investors have
purchased more of the rm's shares than usual. At the same time, the insti-
tutional-buy measure may also be positive. On any given day the number of
shares bought must equal the number sold. However, both individuals and
institutions can experience positive buy measures at the same time. This can
occur if either type of investor increases its sell orders. Additionally, buy orders
can be executed against either the limit order book or the specialist.
Lastly, the eect of the timing of the news releases is not clear. Some news
items (like earnings announcements) will be released over the wire on the day
previous to the WSJ publication. Alternatively, the WSJ publication may be
1348 J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366
the rst release to the public for some news stories. Additionally, it may take
time for investors to process the information and make decisions. Therefore,
we use a three-day event window centered on the WSJ publication date to
measure the reaction of investors to the news release. All the abnormal trading
measures reported for the rm-specic analysis are the sum of the three ab-
normal trading measures in the event window.
5. Firm-specic news and trading results
5.1. News topics and trading
As an initial look at the reaction of investors to rm-specic news releases,
we report the abnormal trading overall, and for institutions and individuals
separately, for those rm/days with news and for those without news. Specif-
ically, Panel A of Table 3 reports the mean abnormal fraction of shares traded,
the abnormal institutional shares traded, and the abnormal individual investor
shares traded. We nd that there is signicantly more trading during the 465
rm/days with news releases than expected. The overall abnormal volume, the
institutional abnormal volume, and the individual abnormal volume are all
signicantly positive at the 1% level. Although the abnormal fraction of vol-
ume for institutions is 40% larger than for individuals after news releases, this
dierence is not signicant using a paired t-statistic. On rm/days with no rm-
Table 3
Type of news and abnormal volume
Panel A Panel B: Topic of news article
News
(n =465)
No news
(n =8270)
Earnings
(n =106)
Dividend
(n =102)
Capital
budgeting
(n =147)
Other
news
(n =166)
Abnormal fraction
of shares traded
0.59 )0.03 1.27 0.56 0.49 0.02
(3.05)
++
()1.03) (2.94)
++
(1.33) (1.31) (0.09)
Institutional shares
bought & sold (ab-
normal fraction)
0.87 )0.05 1.73 1.57 0.63 0.25
(3.58)
++
()1.23) (3.16)
++
(2.18)
+
(1.68)
+++
(0.87)
Individual shares
bought & sold (ab-
normal fraction)
0.63 )0.04 1.26 0.78 0.66 0.26
(2.82)
++
()0.98) (2.46)
+
(1.82)
+++
(1.46) (1.08)
Dierence 0.24 )0.01 0.46 0.79 )0.03 0.19
(paired t-statistic) (1.22) ()0.34) (0.96) (1.50) ()0.12) (0.72)
*
Statistical signicance at the 5% level.
**
Statistical signicance at the 1% level.
***
Statistical signicance at the 10% level.
J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366 1349
specic news releases, the mean abnormal volume is small, negative, and not
dierent from zero.
Panel B of Table 3 reports the abnormal trading for the news categories.
There is high volume for earnings news releases. The abnormal trading volume
for both institutional and individual investors is positive and statistically sig-
nicant. Both types of investors also appear to trade on dividend news.
9
The
abnormal trading volume for capital budgeting news is similar between in-
vestors (0.63 for institutions and 0.66 for individuals) but only the institutional
estimate is statistically signicant (at the 10% level). The reported estimates
indicate that no abnormal trading volume occurs around other news releases.
The dierence in abnormal trading volume between institutional and individ-
ual investors is not signicant in any news category.
5.2. News visibility and trading
This section investigates whether news visibility is a factor in motivating
investors to trade. Our proxy for news visibility is the length of the news article
(short, medium, or long) in the WSJ. Note that, as long as the information is
conveyed, the length (or visibility) of the article should not matter in traditional
models of trading behavior. The visibility of the article could matter to those
investors in agency relationships with clients if higher visibility news releases
provide evidence of ``prudence'' by the duciary. Additionally, longer articles
may convey more information or may seem to be more important.
Table 4 reports the mean abnormal trading volume sorted by the length of
the news article. The table shows that institutional trading is not related to
news visibility.
10
Institutional abnormal trading is similar across all article
length: 1.03, 0.83, and 0.98 from short to long. Trading around the short and
medium articles are signicant, the long articles estimate is similar but not
signicant, probably due to a lack of power in the small sample. Individual
investors do seem to respond to the visibility of the news release. Although the
individual abnormal trading is signicantly positive for all three article lengths,
the magnitude increases as the article length increases (the F-statistic cannot
reject that they are equal, however). Lastly, the abnormal trading diers be-
tween individuals and institutions. Institutional investors are more likely to
trade based on shorter news releases than individuals; individuals trade more as
a result of longer news releases. These dierences are signicant at the 5% level.
9
Gosnell et al. (1996) nd that general order imbalance occurs for negative dividend surprises
but not positive dividend surprises.
10
One explanation is that many institutional investors receive the news through an electronic
service (like Reuters). All articles on an electronic service are simply listed by title, therefore they all
have the same visibility.
1350 J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366
One could argue that the length of the news article might simply be a
proxy for the importance of the news. The WSJ may dedicate a signicant
amount of space for very important news stories and allocate less space for
less important news. If this interpretation of the article length is valid, then
we should see an increasing amount of trading as article length increases.
However, this relationship only holds for individuals and not for institutions
or for the market overall. Additionally, Table 3 reported that investors tend
to trade more on earnings and dividend news, but Table 1 shows that these
two categories mostly result in short articles. In a later section, we use
abnormal returns to proxy for importance, or impact, of news releases.
Regardless, we later use regression analysis, which includes article length,
news topic, and abnormal return, to investigate these multivariate rela-
tionships.
5.3. Good/bad news and trading
Up to this point, we have been investigating the factors of rm-specic news
that motivate investors to trade. We have used institutional and individual
abnormal trading volumes to measure the investor reaction to public news
releases. In this section we investigate the impact of good, neutral, and bad
news on investor trading. Since dierences may exist in the reaction of dierent
investor types (see, for example, Lee, 1992), the time it takes for investors to
react (see, for example, Hong et al., 2000), and between buying and selling
behavior (see, for example, Shefrin and Statman, 1985), we investigate ab-
normal buying and abnormal selling.
Table 4
News visibility and abnormal volume
Length of news article F-statistic
Short
(n =355)
Medium
(n =127)
Long
(n =25)
Abnormal shares traded 0.66 0.42 2.70 3.04
+
(2.89)
++
(1.33) (1.73)
+++
Institutional shares
bought & sold (abnormal
fraction)
1.03 0.83 0.98 0.25
(3.41)
++
(1.96)
+++
(1.05)
Individual shares bought
& sold (abnormal frac-
tion)
0.52 1.21 2.22
(2.02)
+
(2.35)
+
(1.79)
+++
1.71
Dierence 0.51 )0.38 )1.24 4.19
+
(paired t-statistic) (2.14)
+
()1.13) ()2.40)
+
*
Statistical signicance at the 5% level.
**
Statistical signicance at the 1% level.
***
Statistical signicance at the 10% level.
J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366 1351
The relationship between volume and price movement, without regard to
who is trading, has been studied extensively. Karpo (1987) reviews this lit-
erature and identies two dierent relationships between volume and price
movement. The rst is a positive relationship between volume and the mag-
nitude of the price change. This relationship predicts high volume for both
good and bad news releases. The second nding is a positive relationship be-
tween volume and the price change per se. This relationship predicts high
volume for good news and low volume for bad news.
To determine whether the news was good or bad, we calculate a market-
adjusted return for the three days around each rm news/day. Each news re-
lease was then rank ordered by this return. The highest third are considered
good news, the middle third neutral, and the bottom third bad news.
11
One
could interpret this variable as a measure of news importance, that is, good and
bad news are important releases, while the neutral news are less important or
expected. Table 5 reports the mean abnormal trading measures for good,
neutral, and bad news. Panel A reports that the good news releases caused an
average three-day, market adjusted return of 5.35%. The price reaction to both
neutral news and bad news was )0.12% and )5.55%, respectively. Only the
good news releases caused signicantly positive abnormal trading activity. The
good news reaction is consistent with both the volumeprice change relation-
ships discussed in Karpo (1987), while the bad news reaction is consistent with
neither relationship.
Panel B reports the abnormal buy and sell trading of institutional inves-
tors. Institutional investors tend to buy on both good and bad news, al-
though the buying on good news is stronger. Institutional investors also sell
on both good and bad news. They do not trade abnormally on news releases
that do not change prices. This is consistent with a positive correlation be-
tween volume and the absolute value of price changes. Presumably, these
news releases either are expected or they do not oer the investor new in-
formation. Lastly, institutional buying and selling behavior is not signi-
cantly dierent.
Panel C reports the trading of individual investors. Individuals buy on good
news, conduct normal buying activity on bad news, and conduct signicantly
less buying than usual on neutral news. Individuals sell on good news and
conduct normal selling volume on neutral and bad news. Note that our results
for selling behavior are consistent with the disposition eect (see Shefrin and
Statman, 1985). That is, selling on good news is consistent with selling winners
too soon and not selling on bad news is consistent with holding losers too long.
Our results are also consistent with the hypothesis that bad news travels more
slowly than good news through the individual investor population (Hong and
11
All events in the good (bad) news sample have positive (negative) market-adjusted returns.
1352 J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366
Stein, 1999; Hong et al., 2000). That is, if bad news travels more slowly, then
investor reaction will be slow and may not be captured within the event win-
dow of this analysis. Also, note that individual volume is not highly correlated
with the absolute value of price changes. Although individuals are both buying
and selling on good news, the buying behavior is signicantly stronger using a
paired t-test.
Lastly, we test for dierences in buying and selling between the two types of
investors. Panel D reports the dierence in abnormal buy and sell volume
Table 5
Good news, bad news, neutral news and abnormal volume
Good news
(n =154)
Neutral news
(n =155)
Bad news
(n =154)
F-statistic
Panel A: Trading
Abnormal 3 day return 5.35% )0.12% )5.55% 101.73
++
(9.95)
++
()1.85)
+++
()7.26)
++
Abnormal shares traded 1.44 )0.24 0.58 6.43
++
(4.13)
++
()1.08) (1.44)
Panel B: Institutional investor trading
Bought (abnormal fraction of
institutional shares)
1.78 )0.27 1.18 5.36
++
(3.83)
++
()1.19) (1.96)
+++
Sold (abnormal fraction of
institutional shares)
1.51 )0.09 0.89 4.50
+
(3.28)
++
()0.31) (2.32)
+
Dierence (paired t-statistic) 0.28 )0.18 0.28 0.55
(0.81) ()0.79) (0.61)
Panel C: Individual investor trading
Bought (abnormal fraction of
individual shares)
3.06 )0.61 )0.03 15.10
++
(3.97)
++
()2.41)
+
()0.09)
Sold (abnormal fraction of
individual shares)
1.41 )0.10 0.18 5.97
++
(3.41)
++
()0.40) (0.59)
Dierence (paired t-statistic) 1.66 )0.52 )0.21 5.59
++
(2.31)
+
()1.60) ()0.60)
Panel D: Dierence between institutional and individual trading
Dierence in buying )1.28 0.35 1.21 7.82
++
(paired t-statistic) ()2.32)
+
(1.49) (2.39)
+
Dierence in selling 0.10 0.01 0.71 0.87
(paired t-statistic) (0.20) (0.03) (1.79)
+++
Panel E: Order imbalance
Institutional 0.085 )0.009 )0.119 2.27
+++
(1.30) ()0.14) ()1.64)
Individual 0.235 0.048 0.024 1.65
(2.49)
+
(0.56) (0.26)
*
Statistical signicance at the 5% level.
**
Statistical signicance at the 1% level.
***
Statistical signicance at the 10% level.
J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366 1353
between institutional investors and individual investors (and associated paired
t-statistics) for good, neutral, and bad news. For buying behavior, individuals
exhibit stronger buying than institutions on good news releases (at the 5%
signicance level) but smaller buying abnormal volume on bad news (at the 5%
signicance level). The selling behavior of institutions is not signicantly dif-
ferent from the behavior of individuals except for bad news, where institutional
selling is stronger.
Lee (1992) reports the order imbalance around earnings announcements. We
calculate an order imbalance to measure the dierence in buy volume and sell
volume to discover any price pressure exerted by the traders. The institutional
order imbalance measure is dened as
Order Imbalance
i;t
=
Inst Buy Shares
i;t
Inst Sell Shares
i;t
Inst Buy Shares
i;t
Inst Sell Shares
i;t
E[Order Imbalance
i
[; (5)
where Inst_Buy_Shares
i;t
is the number of shares purchased with a market
order by institutions for rm i on day t. Inst_Sell_Shares
i;t
is the number of
shares institutions sold during the day, and E[[ is the expectation operator.
We use the time series average of the rst term as the expected order im-
balance in the last term. The order imbalance measure is calculated for each
rm, each day. One measure is calculated for institutional trades and one is
calculated for individual trades. Note that positive (negative) estimates indi-
cate that institutions purchased (sold) more shares of the rm than they sold
(purchased). The order imbalance reported in Panel E of the table is the sum
of Eq. (5) around the three-day event window and averaged across the good/
neutral/bad events.
The estimates reported for institutional order imbalance are positive for
good news releases, but not signicant. The order imbalance around neutral
and bad news is negative but not signicantly dierent from zero. The esti-
mates for individual investors are all positive, but only the good news estimate
is statistically signicant. This suggests individuals buy more shares than they
purchase around these types of announcements.
5.4. Regression analysis
We have shown in the previous univariate analyses that many factors aect
investors decisions to trade. However, some of these variables may be highly
correlated. For example, institutions are motivated to trade because of earn-
ings news (Table 3) and because of short articles (Table 4). However, most
earnings news are contained in rather brief articles (Table 1). In this section, we
1354 J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366
use multivariate regression analysis to sort out which factors induce investors
to trade.
We conduct the following pooled regression (leaving rm and time sub-
scripts out):
abnormal volume = a
0
b
1
good b
2
bad c
1
short c
2
medium
c
3
long d
1
Earn d
2
Div d
3
CapBudg
d
4
Other News a
1
ln(size) e; (6)
where the dependent variable, abnormal volume, is one of the measures used
previously, that is, the buy and sell abnormal trading volume of institutions
and individuals. All the independent variables, except ln(size), are dummy
variables indicating one when the event occurs and zero otherwise. For ex-
ample, a medium length article about capital budgeting that causes an in-
crease in price is denoted by the variables good, medium, and CapBudg, each
equal to one. The variable ln(size) is the natural logarithm of rm capital-
ization in millions. The estimation is conducted for all rm/days in the sample
(n =8173).
The regression results are reported in Table 6. Panel A compares the ex-
planatory variables for the abnormal buy volume of institutions and individ-
uals. Institutions are motivated to purchase rms on both good and bad news
releases (both statistically signicant at the 5% level or better). News visibility
(as measured by the length of the article) does not signicantly inuence in-
stitutional buying behavior. After accounting for the other factors, earnings
and dividend news induce institutional buying (although estimates are not
statistically signicant). For individual investors, the results suggest that they
buy on good news but not bad news. The visibility of the article is also im-
portant. The estimates for short, medium, and long articles are 0.54, 1.97, and
3.83, respectively, with both the medium and long articles statistically signi-
cant. The news topic is not important in motivating buying, although the
capital budgeting and other news categories induce less buying than expected.
The third column of Panel A reports an F-statistic for the test of equal re-
gression estimates between the institutional and individual investors. Two of
the estimated coecients are statistically dierent. Although both types of
investors buy on good news, the buying from individuals is signicantly higher,
at the 10% signicance level. Additionally, the buying by individuals is sig-
nicantly higher (at the 5% level) than the buying by institutions when the news
article is lengthy.
Panel B reports the estimates for the abnormal sell volume of institutions
and individuals. The results for institutional selling are very similar to the
buying behavior results. Institutions sell on good news and earnings releases,
although the earnings estimate is not signicant. The adjusted R
2
for the two
institutional investor regressions (0.52% and 0.27%, respectively) indicate that
J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366 1355
rm-specic news releases do not explain the trading behavior of institutional
investors very well. Note that these results are consistent with institutions being
economic investors. That is, institutions are not aected by the length of the
news story; they buy and sell on both good and bad news, and tend to trade on
news directly related to cash ow (earnings and dividend news). The results for
individual investor selling behavior are also very similar to their buying be-
havior. Individuals sell on good news and high visibility. The magnitudes of the
estimates and t-statistics are smaller for selling volume than for buying volume,
however. This evidence supports the results we previously reported for indi-
Table 6
Regressions of institutional versus individual investor trading from news in WSJ
Dependent variable Panel A: Buy volume Panel B: Sell volume
Institu-
tional ab-
normal
fraction
Institu-
tional ab-
normal
fraction
F-value Institu-
tional ab-
normal
fraction
Individual
abnormal
fraction
F-value
Intercept )0.03 0.15 0.10 0.07
()0.10) (0.51) (0.39) (0.32)
Eect
Good news 1.78 3.09 3.58
+++
1.31 0.82 2.21
(3.41)
++
(6.00)
++
(2.67)
++
(2.03)
+++
Bad news 1.36 0.32 0.87 0.57 0.32 0.20
(2.59)
+++
(0.61) (1.15) (0.78)
Visibility
Short article 0.02 0.54 0.13 0.20 0.44 0.18
(0.03) (0.72) (0.28) (0.75)
Medium article 0.90 1.97 1.43 0.49 1.19 1.05
(1.18) (2.59)
++
(0.68) (1.99)
+++
Long article 0.86 3.83 4.59
++
0.71 2.01 1.52
(0.77) (3.48)
++
(0.67) (2.32)
+++
Topic
Earnings 0.96 )0.33 1.53 0.64 )0.07 0.78
(1.20) ()0.42) (0.84) ()0.12)
Dividend 0.50 )0.78 1.49 0.33 0.15 0.05
(0.63) ()1.00) (0.44) (0.24)
Capital budgeting )0.41 )1.23 0.82 )0.03 )0.45 0.39
()0.55) ()1.68)
+++
()0.04) ()0.77)
Other )1.12 )1.96 0.99 )0.61 )1.46 1.54
()1.54) ()2.73)
++
()0.89) ()2.59)
++
ln (capitalization) )0.003 )0.016 0.30 )0.012 )0.008 0.04
()0.12) ()0.68) ()0.57) ()0.46)
Adjusted R
2
0.52% 0.92% 0.27% 0.24%
**
Statistical signicance at the 1% level.
***
Statistical signicance at the 10% level.
1356 J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366
vidual investors. That is, they are aected by the length of the news article and
their selling is consistent with the disposition eect. In tests for dierences
between the institutional and individual coecients, none were signicantly
dierent.
6. Macro-economic news and trading behavior
A well-established paradigm in nance is that security trading is aected by
news arrival. Indeed, the media, nancial analysts, and businesses devote much
attention to the prediction and realization of economic indicators. McQueen
and Roley (1993) examine the impact of macro-economic announcements on
the stock market and they nd a strong relationship between economic news
and stock market reaction. Bessembinder et al. (1996) nd that market-wide
news impacts large rms, but not small rms. Adams et al. (1999) conrm this
nding for both Producer and Consumer Price Index announcements. These
studies do not test for which type of investor follows (and trade on) macro-
announcements. In this section we examine the reaction of institutions and
individuals to macro-economic announcements.
6.1. Data and methods
The ocial announcements of many economic indicators are scheduled in
advance. Ederington and Lee (1993) describe the process by which the federal
agencies type the news release in advance so that it can be distributed at the
scheduled time. Market participants interested in indicators such as Housing
Starts, Consumer Price Index, Jobless Rate, etc., can examine publications
such as Barron's Weekly to nd when the news release is scheduled to be an-
nounced. Data on the news category, day, and time of each scheduled an-
nouncement during the three-month sample period are collected from the
``Preview: This Week'' section of Barron's.
12
Table 7 reports that 35 of the 63 total number of days in the sample have at
least one economic announcement before 2 p.m. Of the 35 days, 28 experience
only one announcement, while 5 experienced two announcements. One day
experienced three announcements and another four announcements. In all,
there were 17 dierent types of macro-announcements. These announcements
are listed in Panel B of Appendix A table.
12
We searched the Dow Jones News Wire to be sure that all scheduled announcements were
indeed released at the correct time and date.
J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366 1357
Due to the nature of the macro-economic announcements, we made two
important modications to the methods previously described. Since these
macro-economic announcements are released at a specic time and date, we
can rene the abnormal volume measures previously used. Investors who are
interested in the macro-news know in advance when it will be released.
Therefore, there is no reason to include the day before or the day after the
announcement in the volume measures. Consequently, the volume and im-
balance measures use only the announcement day for the macro-economic
announcement analysis instead of the three-day window previously used.
The second change we made has to do with the calculation of the ab-
normal trading volume. Eq. (4) adjusts the trading volume measure for
volume due to macro-(instead of rm specic) events. However, we now
examine macro-announcements. We modify Eq. (4) as shown in Eq. (7).
This abnormal individual trading measure also has an expected value of
zero for all rms, therefore interpretations of the estimates are the same as
before.
AbnormalInd Trading
i;t
=
Ind Shares
i;t
(1=63)
P
63
t=1
Ind Shares
i;t
1: (7)
6.2. Trading reaction to macro-announcements
We begin the analysis by separating the macro-announcements as good or
bad news by calculating a market return for the day of each announcement.
Each announcement day was then rank ordered by this return, in similar
fashion to the rm specic analysis. The highest third are considered good
news, the middle third neutral, and the bottom third are considered bad news.
Table 8 reports the mean abnormal trading measures for good, neutral, and
bad news. Good macro-economic news is associated with nearly 12% more
volume than normal and has a mean one day market return of 1.93%. Bad
news has a mean one day market return of )0.15% and 8% higher volume than
normal. The neutral announcement days do not have signicantly high volume.
Table 7
Distribution of macro-economic news
Days
Total days in sample 63
Total days with a macro-announcement before 2 p.m. 35
Days with 1 macro-announcement 28
Days with 2 macro-announcemets 5
Days with 3 macro-announcemets 1
Days with 4 macro-announcemets 1
1358 J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366
These results are consistent with the positive relationship between volume and
the magnitude of price changes. However, the results are not consistent with a
positive relationship between volume and the price change per se (see Karpo,
1987).
Panel B reports the buying behavior of institutions and individuals. Both
institutions and individuals signicantly increase their purchases on days of
good macro-announcements. Purchases are not signicantly dierent than
normal on neutral and bad news announcement days. An F-statistic tests the
dierence between institutional and individual abnormal purchases. Although
both types of investors make abnormally high levels of purchases during good
news, individuals have signicantly higher (at the 1% level) purchase rates than
institutions. Panel C reports the selling behavior. Institutions make signi-
cantly higher sales on days with bad economic news. Individuals do not have
signicantly high sales. Individuals sell at signicantly lower rates than normal
on days with good economic news.
Table 8
Reaction to macro-news
Good news Neutral news Bad news F-statistic
Panel A: Trading
One day market return 1.93% 0.51% )0.15% )
Abnormal shares 0.116 0.033 0.079 0.76
Traded (2.32)
+
(0.72) (1.67)
+++
Panel B: Abnormal buying
Institutions 0.156 0.105 0.67 0.38
(2.13)
+
(1.58) (0.97)
Individuals 0.438 0.017 )0.077 12.06
(5.44)
++
(0.24) ()0.99)
F-statistic 9.73
++
1.13 2.78
+++
Panel C: Abnormal selling
Institutions )0.081 0.064 0.329 8.30
++
()1.09) (0.94) (4.64)
++
Individuals )0.095 0.081 0.037 2.95
+++
()1.73)
+++
(1.61) (0.71)
F-statistic 0.06 0.06 16.78
++
Panel D: Order imbalance
Institutional 0.061 0.010 )0.036 8.08
++
(3.46)
++
(0.62) ()2.19)
+
Individual 0.109 0.015 )0.044 20.37
++
(6.22)
++
(0.92) ()2.65)
++
F-statistic 3.34
+++
0.57 0.64
*
Statistical signicance at the 5% level.
**
Statistical signicance at the 1% level.
***
Statistical signicance at the 10% level.
J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366 1359
Lastly, we examine the order imbalance measure in the good and bad news
samples. Panel D shows that both types of investors make signicantly more
market purchases than sales on good economic announcement days. However,
the estimate for individuals is also signicantly higher than the estimate for
institutions. Both types of investors also make signicantly more sales than
purchases on bad news days.
6.3. Delayed reaction to good news
Lo and MacKinlay (1990) found that the return of small stocks is correlated
with the lagged return on large stocks. The search began to explain this lead/lag
relationship. More recently, McQueen et al. (1996), henceforth MPT, further
rened the puzzle by reporting that the small stock return correlation primarily
occurs when the stock market is up. No correlation exists during down mar-
kets. Their results are consistent with a delayed reaction in small stocks to good
news. Specically, they conclude:
One possible story consistent with our ndings is that investors attempt to
sell all stocks quickly when news of the economy is bad. When the news is
good, the market participants quickly buy large, easy to price stocks but
take their time and ``shop around'' before buying smaller, more volatile
stocks. (pp. 916917)
MPT are concluding that asymmetric investor trading behavior around
good news releases are causing the lead/lag relationship between large and
small stocks. They do not, however, actually test the behavior of investors or
the stock price eects around news releases. They proxy for systematic news
releases using large movements of the market.
We more directly investigate their hypothesis here. Specically, we identify
the good and bad macro-economic news announcements in our sample using
the market return on the day of the release. The rms are classied into size
quintiles using the NYSE breakpoints. Dummy variables are used to indicate
when a rm is small (smallest size quintile) or large (largest size quintile). The
following ordinary least squares regression is estimated as
Abnormal Trading
i;t
= aD
small firm
bD
large firm
e: (8)
The abnormal trading in the regression equation will be the institutional
and individual buy and sell trading measures. Eq. (8) is estimated in a
sample of good news announcements about small or large rms (Panel A)
and a sample of bad news about small or large rms (Panel B) and reported
in Table 9.
1360 J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366
MPT hypothesize that when good news occurs, market participants react
more slowly to small rms than large rms. Panel A of the table reports the
regression estimates of abnormal trading around good news releases. The rst
row estimates deal with institutional purchasing. The results suggest that in-
stitutions do not engage in higher amounts of buying than usual in small rms
during good economic announcements (the estimate is negative and not sta-
tistically dierent from zero). However, institutions do engage in more buying
(signicant at the 5% level) than normal of large rms during good economic
announcements. Additionally, the F-statistic in the third column reports that
the dierence in buying between small and large rms is signicantly dierent
at the 5% level. As reported in the second row, the same buying behavior
occurs for individuals reacting to good news as well. Note that this evidence is
consistent with the MPT hypothesis. That is, given good news, investors react
quickly in large rms but not in small rms. The F-statistic of 9.07 in the third
row indicates that the buying of large rms is higher for individuals than for
institutions.
The other half of the MPT hypothesis is that investors react quickly to
bad news in both small and large rms. Panel B of the table reports the
regression estimates for the sample of bad economic announcements. The
fourth row shows the results for institutional selling. Institutions seem to
react quickly to bad news by selling large rms (estimate is signicantly
positive at the 1% level) but not small rms. Individuals also sell large (and
not small) rms during bad economic announcements. The selling of large
rms by institutions is signicantly higher than by individuals. Note that the
MPT hypothesis would predict signicant abnormal trading of both small
Table 9
Tests of size asymmetries in the reaction to macro-news
Panel A: Good news Panel B: Bad news
Small
rms
Large
rms
F-statistic Small
rms
Large
rms
F-statistic
Institutional buy )0.20 0.42 5.88
+
)0.15 0.42 5.04
+
()1.20) (2.17)
+
()0.89) (2.20)
+
Individual buy 0.11 1.10 7.09
++
0.05 )0.18 0.91
(0.43) (3.94)
++
(0.31) ()1.00)
F-statistic 2.00 9.07
++
0.66 6.31
+
Institutional sell )0.21 0.04 1.75 0.02 0.78 7.27
++
()1.71)
+++
(0.26) (0.11) (3.68)
++
Individual sell )0.37 0.10 9.40
++
)0.06 0.28 3.68
+
()3.64)
++
(0.89) ()0.51) (2.10)
+
F-statistic 1.72 0.23 0.25 7.28
++
*
Statistical signicance at the 5% level.
**
Statistical signicance at the 1% level.
***
Statistical signicance at the 10% level.
J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366 1361
and large rms after bad news. Overall, the results are consistent with the
ndings of Bessembinder et al. (1996). That is, trading of large rms is
aected by macro-economic announcements, whereas trading of small rms
is not.
7. Conclusions
We investigate the trading behavior of investors using the buy and sell
volume of institutions and individuals around rm-specic news releases in
the Wall Street Journal and macro-economic announcements. For the rm-
specic news, our sample includes 465 news release/days about 120 rms
over the period 1 November 1990 to 31 January 1991. Each news article
was classied by news topic, visibility, and good versus bad news. We nd
that investors conduct heavy trading around the publication of rm-specic
news in general, and earnings, dividend, and capital budgeting news in
particular.
Individual investor motivation to trade is aected by the visibility of the
news, as proxied by the length of the news article. Good news induces both
buying and selling, whereas bad news does not cause abnormal trading by
individuals. This nding is consistent with the hypothesis suggested by Hong et
al. (2000) that bad news travels more slowly than good news. However, after
accounting for highly visible, good news articles, no other news attribute
motivated individual investors to buy or sell the rm. Overall, news releases do
not explain individual selling behavior very well. Our results are consistent with
the disposition eect (Shefrin and Statman, 1985), that is, individual investors
sell on good news but not bad news.
Institutional investors, however, were not aected by the length of the news
article. Unlike individuals, institutions purchased and sold shares after both
good and bad news. After accounting for other news attributes, we conclude
that earnings and dividends only slightly interested institutions. We also doc-
ument that the well-known positive correlation between trading volume and
the absolute value of price changes comes primarily from the trading of in-
stitutions, not individual investors.
For the macro-economic announcement analysis, we nd that both good
and bad news induce trading by institutions and individuals. Both types of
investors have order imbalances that favor purchases during good news an-
nouncements and favor sales during bad news announcements. McQueen et
al. (1996) nd that the correlation between small rm returns and lagged
large rm returns occur during up markets and not down markets. They
hypothesize that investors react quickly to bad news in the trading of small
and large rms, but react quickly in only large rms to good news. This
causes a delay in the response of small rms to good news and creates the
1362 J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366
correlation between small and lagged large rm returns. We test the reaction
of investors in small and large rms during good and bad macro-economic
announcements. Our evidence suggests that both institutions and individuals
react quickly in large rms, but not small rms, to good news. These results
support the delayed reaction hypothesis. However, we also nd that institu-
tions and individuals react quickly in large rms, but not small rms, to bad
news. Their hypothesis would predict a quick reaction to bad news in both
small and large rms.
Whether seeking private information, inferring information, or maximizing
wealth, the behavior of investors is central to the equilibrium of theoretical
models. Our results suggest that attributes of public announcements aect the
motivation to trade. This has the potential to aect the timing of price ad-
justments and volume to information. For example, Easley and OHara (1992)
model the process of security price adjustment to information. We nd that the
process of making decisions and executing trades may take dierent amounts
of time for purchases and sales and may be related to other factors such as rm
size. Additionally, the dierences in who trades (and when) on dierent types of
information releases may aect investors decisions' to seek private information,
see Kim and Verrecchia (1991).
Acknowledgements
I thank seminar participants at the Financial Management Association and
Marquette University and two anonymous reviewers for insightful comments. I
thank Rick Sias for help in understanding the Torq dataset.
Appendix A
Table 10
Description of news categories
Category Types of news included in category
Panel A: Firm specic news
Earnings Quarterly and annual earnings announcements, net income and
realized sales gures
Dividends Cash and stock dividend announcements
Capital budgeting Capital investments, joint ventures, new products
Other news Stock buybacks and splits, and debt renancing and credit
ratings; Business operations, costs, prices, labor, and competition;
Management news, changes, compensation; Heard on the Street;
Reorganization, including layos and asset movement within the
rm; bankruptcy, and legal news; Industry regulation, forecasts
J.R. Nofsinger / Journal of Banking & Finance 25 (2001) 13391366 1363
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