Abstract:
Akbas (2016) supports Diamond and Verrecchia’s (1987) theoretical argument that unusually low trading activity conveys negative information; since, under short-sales constraints, informed agents remain on the sidelines and cannot trade on their negative information. This paper seeks to provide an external validation to the study in three prominent ways. First, I externally validate Akbas’ (2016) United States (US) results using an out of sample period. Secondly, I test Akbas’ (2016) conjectures by transcending borders using a global sample. Finally, using a more precise short-sale constraint variable, I cast away any doubts about Akbas’ (2016) short-sale constraint proxies. I find strong support across international stock markets that unusually low trading turnover during the pre-announcement week signals upcoming negative earnings news, where the presence of short-sale constraints further pronounces the informativeness of unusually low trading turnover. However, I do not observe the same effect for unusually high turnover, meaning an asymmetric relationship exists, confirming that negative asymmetric information is reflected only in the expectations of the ‘sidelined’ short sellers, who are bound by short-sale constraints.
