- Indeed,
- large contract negotiations involve many parties, which creates many opportunities for leaks.
-
directors know what earnings are before they are published, as do the director's assistant, the outside PR agency, and others.
This is also a reason why managers issue earnings warnings: Warnings cut down on possible leaks.
As a measure of possible information leakage, I took a sample of 98 companies and calculated the level of Large Effective Volume divergence to price in a period of a few days before the stock price opened in a gap (up or down). I took gaps that provoked price changes of at least 5%. The idea was to see if the Large Effective Volume pattern was giving advance warning of what was going to happen.
I found 120 gaps. Out of these, 63 were up-gaps, while 57 were down-gaps. The results are interesting and are summarized in the two tables below.
For the down-gaps, as shown in Table 6, I found in 25% of the cases that during one or several days before the gap, Large Effective Volume signals were, on average, showing that something was wrong. The stronger the news was, the stronger the signal of Large Effective Volume before the down-gap.
Table 6
However, what is really shocking is Table 7. This table shows that the great majority of the up-gaps gave early warning signs via the Large Effective Volume (65%, or about 2 out of 3 cases).
Table 7
This clearly shows that information leaks are really happening. I believe that the difference between the two tables is easy to explain; when you hear that good news is about to come out, you buy the stock. If you hear that bad news is about to come out, you do nothing, especially if you do not own the shares of the company (On average, only 10% of investors place "shorts".). If you are an insider and you sell, then you go to jail. If you tell your sister (Martha Stewart) and she sells, she goes to jail. The difference between the two tables indicates that what Large Effective Volume shows is not insider trading, but information leaks.