Are Order Imbalances Indicative of Private Information?

Order imbalances are often taken to be a reflection of trading by informed investors. Yet order imbalances may simply be random shocks, and the price effects associated with the imbalances may reflect the inventory pressures of unbalanced trading rather than information conveyed by informed traders. If order imbalances reflect informed trading, they should anticipate major news events. We take earnings announcements as our information event, and we test whether order imbalances are related to the subsequent news. They are not. We conclude that imbalances are not primarily or even partially a reflection of information of informed trades, but rather are random trading noise. Order imbalances are not correlated with the forthcoming earnings information, but they are correlated with contemporaneous returns, suggesting that trading pressures are the source of this association. We find some evidence that order imbalances after an announcement are correlated with the announcement, which is consistent with the post-earnings-announcement-drift anomaly