Ownership Concentration, Foreign Shareholding, Audit Quality and Firm-Specific Return Variation: Evidence from China

Abstract

This paper investigates the effects of ownership concentration, foreign ownership and audit quality on the amount of firm-specific information incorporated into share prices (as measured by stock price synchronicity). With a large sample of firms listed on the emerging Chinese market over the 1996-2003 period, our analysis shows that stock price synchronicity has a nonlinear relation with ownership concentration: it initially increases at a decreasing rate up to a certain level, and then begins to decrease, as the shareholding by the largest shareholder increases. We also find that stock price synchronicity is higher when the largest shareholder is government-related than otherwise. We also find that the presence of shares issued to foreign investors and the appointment of high-quality auditors lead to a decrease in synchronicity. Finally, we provide evidence that our measure of stock price synchronicity is associated with the amount of earnings information reflected in stock returns.