The high-volume return premium and changes in investor recognition

Narelle Gordon and Qiongbing Wu

Pacific-Basin Finance Journal, 2018, vol. 51, issue C, 121-136

Abstract: The phenomenon of high-volume return premium is generally attributed to the visibility hypothesis proposed by Gervais et al. (2001) based on the theoretical framework of Miller (1977) and Merton's (1987) investor recognition hypothesis. However, no existing empirical study has directly tested the visibility hypothesis due to the lack of high-frequency shareholding data. In this paper, we utilize the unique daily shareholding data for stocks listed on the Australian Stock Exchange to directly test this hypothesis by examining the relationship between the high-volume return premium and changes in investor recognition. We find that high-volume shocks do attract more investor attention and increase the investor base on the date of, and following, the shocks. This provides direct empirical evidence in support of the visibility explanation for the high-volume return premium. We also find that institutional and individual investors attend to different kinds of stocks; stocks attracting more institutional (individual) investors outperform (underperform) subsequent the volume shocks and exhibit a higher (lower) high-volume return premium. Our findings shed new light on the visibility hypothesis by showing that recognition/attention from institutional or individual investor is also crucial in determining the extent of the high-volume return premium and may help to reconcile the existing mixed empirical evidence across international markets.

Keywords: High volume return premium; Investor recognition; Breadth of ownership; Investor base; Institutional ownership (search for similar items in EconPapers)
JEL-codes: G11 G12 G14 (search for similar items in EconPapers)
Date: 2018
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:51:y:2018:i:c:p:121-136

DOI: 10.1016/j.pacfin.2018.06.006

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