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This study provides evidence regarding the effects of online trading on stock market reactions to quarterly earnings announcements. We test for differences in stock price and volume reactions to quarterly earnings announcements between a period with a significant amount of online trading (1996-1999) and a period without online trading (1992-1995). We conjecture that online trading has increased the proportion of naive investors in the market. Based on noisy rational expectations models of trade, we predict that this will result in larger stock price and trading volume reactions to earnings announcements. We find strong evidence in support of these predictions. The stock price results suggest that the advent of online trading has decreased average prior precision and the trading volume results suggest that online trading has increased differential belief revisions around earnings announcements. An analysis of the relation between volume reactions and price reactions in both periods suggests that the increase in differential belief revisions is primarily due to an increase in the differential interpretation of earnings announcements in the online trading period. Our findings are relevant for assessing the validity of concerns about online trading expressed by regulators and the validity of theoretical models of trade with asymmetrically informed investors.

This study investigates determinants of budgetary slack using the framework of agency theory and the methods of experimental economics. A computerized, five-period experiment is designed to test the robustness of prior experimental results documenting budgeting behavior inconsistent with economic rationality and self-interest. Similar to prior experiments, pay scheme and information asymmetry are manipulated. In addition, a personality questionnaire and several questions on an exit questionnaire are included to test the effects of reputation and ethical concerns on budgetary slack. A two-way analysis of variance with pay scheme and information asymmetry as factors finds a significant effect for pay scheme, information asymmetry, and their interaction. By controlling social interactions and increasing subject experience, this study is able to document slack levels closer to agency predictions than prior experimental studies. Nevertheless, subjects given the slack-inducing pay scheme are found to restrict the amount of slack in their budgets below 100% (36% to 60% on average) and subjects given the truth-inducing pay scheme are found to build a small but significant amount of slack under most experimental conditions (3.2% to 4% on average). A regression analysis with non-pecuniary factors added to the model finds that budgetary slack is also reduced by reputation concerns, ethical concerns, and a measure of ethical responsibility from the personality questionnaire. This study is able to explain more of the variance in slack than prior studies using traditional agency variables alone.