Abstract
Our paper uses A-share firms listed on Shanghai Stock Exchange (SSE) and Shenzhen Stock Exchange (SZSE) to explore the role of the textual tone of Chinese listed companies' annual reports on Chinese equities' return comovement. Our paper finds that the tone embedded in A-share companies' annual reports significantly increases Chinese stocks' return comovement as the tone exacerbates information asymmetry and reduces the quality of information. In addition, the annual report tone has a prominent effect on Chinese stocks' return comovement for stocks with low institutional ownership, private ownership stocks, and stocks with low market shares. Further investigation shows that the impact of the tone of the annual report on Chinese stocks' return comovement is strong during economic expansions, and when investor sentiment is high. An additional examination on hidden information in the textual tone suggests that published financial data do not explain a substantial part of the textual tone that is associated with the increase in the comovement, suggesting that private information should enhance informational opaqueness in the stock market.
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