Large Share Price Movements, the Disclosure of News and Corporate Governance: Implications for Disclosure Rules

Abstract

Purpose - This study examines the link between firm-level large share price movements, firm specific company announcements and corporate governance. Stock market regulation in the UK requires firms to disclose new Price Sensitive Information (PSI) immediately via official news providers. We investigate whether large share price movements are accompanied by firm disclosure. We also investigate whether corporate governance attributes influence the degree of disclosure by firms. Design/methodology/approach - We construct our disclosure measure by identifying the largest abnormal daily stock returns for sample firms, and then we search for firm specific announcements in the three day window centered on the abnormal return day. We then collect corporate governance variables known to influence disclosure practice, and test whether these variables influence disclosure for positive and negative (good and bad announcements) abnormal returns. Findings - Large share price movements are accompanied by an official share price movement in 45.2% of cases. This rises to 62.9% when new analyst or newspaper articles are included as potential drivers of the abnormal share price return. The higher the proportion of non-executive directors and CEO/ Chair duality lead to a higher incidence of bad news disclosure, suggesting increased scrutiny works. The higher the level of CEO and board ownership the lower the level of disclosure. Finally, institutional ownership concentration appears to negatively influence the level of disclosure. Originality/value - Higher levels of corporate governance is shown to lead to better firm disclosure. At the same time we find that in almost 40% of large abnormal share price returns no information has come to the market, to drive the share price. Thus, the paper has important messages for regulators, who need to investigate why prices often move a long way without accompanying news. Shareholders, particularly institutions, should ensure high levels of disclosure by company directors.