Financial Reporting and Noise Trading: Evidence from Chinese A-B Twin Shares

Abstract

We test whether public financial reporting can reduce noise trading using the setting of A-B twin shares traded in the Chinese stock markets. Using a theoretical model, we show that in the absence of noise trading, A- and B-share prices should move in synchronicity in response to innovations in fundamentals. The existence of noise trading can, however, cause return non-synchronicity. Using the A-B return non-synchronicity as a measure of noise trading, we find that A-B return non-synchronicity is negatively associated with financial reporting quality and is significantly reduced on earnings announcement dates. Our results remain robust to alternative model specifications. This paper provides the first evidence that quality financial reporting can reduce noise trading and improve price informativeness.