Informed Trading Volume and Asset Prices: The Role for Aggressive Investors
- Working Paper
We examine the trading behavior of particularly aggressive investors, those who contribute the most to daily trading volume, and provide new evidence that is consistent with the presence of informational advantages. Using a unique Chinese data set of the most active daily market participants for each stock, we demonstrate that aggressive investor buying (selling) predicts large positive (negative) abnormal returns, both unconditionally and, in particular, around key, value-relevant announcements. An advantage of our data is that we can also directly identify several plausible channels through which such an informational advantage could arise. Specifically, the abnormal returns are largest (in absolute terms) following announcements in the presence of aggressive pre-event traders who share the same geographic location as the firms in which they trade, and these effects are the most pronounced for stocks with the lowest analyst coverage or the smallest capitalizations. We also find that particularly active traders located near relevant counterparties in an M&A transaction, a new bank loan facility, or a key political change also exhibit informational advantages. Finally, we find that a fraction of aggressive trading is unusually concentrated in individual stocks, suggesting that some component of the informational advantages that we document may reflect insider trading.