Information Content and the Speed of Stock Price Adjustment

Abstract

The process by which security prices adjust to the release of information is an area of study which has received much attention in accounting and finance. In finance, the main interest has been whether prices adjust in a rapid and unbiased manner to new information. In accounting, the focus has been more on whether different accounting disclosures have information content. The study reported here combined both interests in that we investigated the speed of adjustment of releases of information which had different degrees of information content. As illustrations, Dann, Mayers, and Rabb [1977] tested the sensitivity of a block-trade trading rule to the speed of price adjustments. This rule (first suggested by Grier and Albin [1973]) is based on the assumption that abnormal returns can be earned by purchasing shares at the block price and selling at that day's closing price. Dann, Mayers, and Rabb (hereafter DMR) found that unless one could purchase the stock within five minutes of the block trade the profitability of the Grier and Albin rule was seriously impaired. They also found the market price to be an unbiased estimate of the closing price within 15 minutes of the block trade. Similarly, Hillmer and Yu [1979] devised an alternative test for the speed of price adjustment based on a cumulative sum technique. They illustrated the technique by testing for shifts in the parameters of the distributions of price changes and of transaction frequencies around five information events-two earnings announcements and three defense