Idiosyncratic Return Volatility and Price Informativeness: Evidence from Stock Splits

Abstract

Whether higher idiosyncratic return volatility means more or less informative stock prices is an ongoing debate. All the existing literature relies on cross-sectional evidence, which makes it hard to isolate the effects of price informativeness on idiosyncratic volatility from other effects. I circumvent this problem by investigating how price informativeness and idiosyncratic volatility change for the same firm around stock splits. I find a strong negative relation between the change in idiosyncratic volatility and the change in the stock ownership by the more sophisticated institutional investors (especially short-term investors, independent investors, and transient investors, who are the most sophisticated among institutional investors). There is also a negative relation between the change in idiosyncratic volatility and the change in five other commonly used price informativeness measures. Overall, I find that an increase in price informativeness is associated with a decrease in idiosyncratic volatility.