Information disclosure ratings and continuing overreaction: Evidence from the Chinese capital market

Abstract

On the basis of the theory developed by Daniel, Hirshleifer, and Subrahmanyam (DHS) (1998), this study examines the influence of information disclosure rating on continuing overreaction and the role and effects of information disclosure rating in emerging markets. Using a comprehensive sample of firms listed in the Shenzhen Stock Exchange (hereafter, SZSE) from 2001 to 2018, this study finds that a higher information disclosure rating leads to greater continuing overreaction and that increased investor attention, rather than stock liquidity, is the main channel of influence. According to a review of relevant literature, this is the first study to evaluate the association between information disclosure rating and continuing overreaction. After the addition of control variables, use of alternative proxies, and overcoming potential endogeneity problems, a robust conclusion is obtained. Moreover, considering the uniqueness of China’s stock market, tests of the split-share structure reform (SSSR) and state-owned enterprises are conducted. Compared with those of developed countries, China’s information disclosure system is not mature and comprehensive. Therefore, financially illiterate individual investors, when exposed to large amounts of information, are unable to make rational decisions and tend to rely too much on official sources and follow the herd, leading to a more serious continuing overreaction in the market.