Determining the relationship between annual EPS and stock trading volume based on expectancy theory

Abstract

To overcome the shortcomings and deficiencies in the efficient market theory, financial literacy needed approaches to be more consistent with the empirical evidences. Therefore, some activities called non-expecting utility theories “non-EU” were proposed and other models were also proposed in order to answer empirical evidences. One of the most important theories is the Expectancy Theory. In descriptive model of expectancy theory, investors maximize their value function. Schifrin and Stedman (1985) have changed the expectancy theory to a wider theoretical framework with investment approach, which is called disposition effect. Disposition effect states that investors sell shares in the position of profit sooner and keep shares in the position of loss for a long time. This study examines the explanation of annual EPS in stock trading volume based on disposition theory in Tehran Stock Exchange. To achieve this goal, two hypotheses were proposed: 1) there is a meaningful relationship between positive surprises of EPS and trading volume, 2) there is no meaningful relationship between negative surprise of EPS and trading volume. The results indicate that the relationship between annual EPS and stock trading volume is based on disposition theory. And according to the results of the research hypotheses, there is disposition effect in Iran.