TRADING VOLUME WITH PRIVATE VALUATION - EVIDENCE FROM THE EX-DIVIDENDDAY

We test a theory of the interaction between investors' heterogeneity, risk, transaction costs, and trading volume We take advantage of the s pecific nature of trading motives around the distribution of cash divi dends, namely the costly trading of tax shields, Consistent with the t heory, we show that when trades occur because of differential valuatio n of cash flows, an increase in risk or transaction costs reduces volu me We also show that the nonsystematic risk plays a significant role i n determining the volume of trade. Finally, we demonstrate that tradin g volume is positively related to the degree of heterogeneity and the incentives of the various groups to engage in trading.