Academic journal article Academy of Accounting and Financial Studies Journal

CFO Rankings and Trading Volume

Academic journal article Academy of Accounting and Financial Studies Journal

CFO Rankings and Trading Volume

Article excerpt


There is an extensive body of extant literature on the impact of new information disclosure on trading volume. Two dimensions of influence on trading volume address the variations in investor interpretations of the new information, and the role of investor consensus. The differential interpretation theory suggests that greater variation in the interpretation of new information, results in an increase in trading volume. In essence, there is greater trading activity as a product of investors rebalancing their beliefs and market positions in response to the new information. Conversely, greater congruity in the interpretation of new information should result in a decrease in trading volume. The consensus effect theory suggests that the greater the disparity in investor beliefs concerning asset values, the greater will be the level of ensuing trading volume. Conversely, the greater the alignment of investor beliefs, the lower will be the level of subsequent trading volume.

We focus on the change in trading volume of the companies represented in the recent list of "Best CFOs" published by the Wall Street Journal to examine these two theories. We submit that inclusion of a company's CFO in the top-twenty-five list will be subject to minimal variation in interpretation, and will also serve to increase consensus among investors concerning the value of the companies represented in the list. That is, investors will unilaterally interpret inclusion in the list as a reflection of quality management and good news for the represented companies.

The Wall Street Journal's publicly disclosed its list of "Best CFOs" in its July 31, 2012, issue of the paper. Since the Wall Street Journal has the highest circulation of any financial news publication in the world, we contend he public announcement of the top finance chiefs among the SP500 companies provides an excellent scenario to test the relationship between analyst consensus and interpretation of new information, and trading volume. After controlling for trading volume trends in the general market and company-specific trading volume variance, we observe a significant decrease in trading volume for the twenty-five companies on the Best CFO list for the six-month period following the announcement. Our findings are consistent with prior theoretical and empirical studies examining the impact on trading volume surrounding earnings announcements and other public disclosure events.


Several prior studies address how new information disclosure affects trading volume. Theoretical models submit that the reaction of trading volume to new information can be divided into three drivers (Karpoff, 1986; Varian, 1989; and Holthausen and Verrecchia, 1990). The differential interpretation theory addresses the disparity in how the new information is interpreted by market analysts, suggesting that greater dispersion in the interpretation of new information is positively associated with higher trading volume. The posterior beliefs theory indicates that greater dispersion in posterior earnings forecasts is associated with higher trading volume after the news disclosure. The consensus effect theory notes that the degree to which the new information causes analyst forecasts to converge is inversely related to trading volume. The differential interpretation effect and the consensus effect are shown to be separate and distinct influences on trading volume surrounding the disclosure of new information (Atiase, Ajinkya, Dontoh, and Gift, 2011). All three drivers imply that a greater change in investor beliefs produces increased trading volume as investors engage in a greater revision of their market positions. Empirical support is found in some studies for all three reaction drivers (Karpoff, 1986; Varian, 1989; and Holthausen and Verrecchia, 1990).

The impact of the three drivers is observed to be affected by several other influences. …

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