The Relation among Disclosure, Returns, and Trading Volume Information

This paper introduces a model in which the firm's returns depend on trading volume when the firm defers disclosure, because market makers use volume to draw inferences about better-informed investors' private information on firm value. In addition, we show that a firm's commitment to a policy of timely disclosure of a broader range of outcomes dampens the slope coefficient on volume in a Taylor expansion of the log of the absolute value of returns on volume. The reason for this is that when a firm commits to a policy of timely disclosure of a broader range of outcomes, the deferral of a report indicates that the outcome is extreme. This heightens adverse selection. In turn, this makes informed trade more costly and hence less likely, thereby rendering returns less dependent on trading volume as a source of information about firm value. This result predicts that firms committing to more disclosure should experience a smaller slope coefficient on trading volume. Thus, the slope coefficient offers a potential tool for measuring the economic consequences of shifts in disclosure regimes.