Market Informational Efficiency Research Articles

Does Firm‐level Political Uncertainty Affect the Mispricing of Earnings? A Natural Experiment through Government‐to‐business Revolving Door

We utilize a unique setting associated with the mandatory closure of the government‐to‐business revolving door to examine whether and how an exogenous rise in firm‐level political uncertainty affects the mispricing of earnings. The tension that underlies our study stems from two opposing effects. To the extent that such uncertainty can trigger opinion divergence (rational attention) among investors, it is expected to delay (accelerate) price discovery and increase (decrease) security mispricing. Our identification strategy draws on the difference‐in‐differences analysis associated with the Chinese regulation in 2013 that mandated the resignation of corporate independent directors with a government background. Consistent with the dominance of the opinion divergence effect, we observe that these involuntary resignations unintentionally increase delays in share price responses following earnings announcements. These findings are more evident among firms that enjoy more benefits from independent directors with a government background. Further analyses confirm that these involuntary resignations trigger more opinion divergence rather than rational attention among investors by showing significant increases in analyst forecast diversity but no changes in analyst coverage following such resignations. We provide novel evidence that market information efficiency could deteriorate as an unintended consequence of the escalation of firm‐level political uncertainty.

Analyst forecasting and market liquidity dynamics: A comparative analysis of U.S. and Chinese markets pre and post COVID-19

This study investigates the influence of analyst forecasting on market liquidity and information efficiency within developed U.S. and emerging Chinese markets, both before and during the global COVID-19 pandemic. Market liquidity, a crucial aspect of financial market functioning, is assessed using key indicators, including Amihud’s liquidity, turnover and bid/ask spreads. The findings reveal notable disparities in analysts’ forecasts of market dynamics before and after the onset of the COVID-19 crisis. During the pre-COVID-19 period, our analysis confirms a statistically significant relationship between analyst forecasting and market liquidity. However, as the COVID-19 pandemic emerged and evolved, analysts’ forecasting impacts on market liquidity showed a diminishing trend. Furthermore, the effects of analyst forecasting vary across quantiles in the Chinese market. In the United States, buy-sell recommendations and various analyst forecasting variables were significant before the pandemic. These findings underscore the nuanced interplay between analysts’ forecasts and the market dynamics within the studied regions. Most notably, the U.S. and Chinese markets experienced decreased information efficiency during the COVID-19 crisis. This shift resulted in a notable decoupling of analysts’ forecasts from information efficiency during this period. These outcomes have significant implications for scholars and investors alike, enhancing their comprehension of market conditions and investor behaviour when confronted with heightened market stressors, such as the COVID-19 pandemic, which has disrupted international financial markets.

Assessing the impact of digital transformation on capital market information efficiency under environmental uncertainty: Evidence from China.

Digital transformation is an emerging development opportunity for enterprises in the digital economy and comprehensively reflects the application of digital technology to production, operation, and management strategies. This study used data on A-share listed enterprises in Shanghai and Shenzhen from 2007 to 2022 to examine the relationship between the digital transformation of enterprises and information efficiency of the capital market. Findings revealed that digital transformation can improve the information efficiency of the capital market and that environmental uncertainty plays a more significant regulatory role. The greater the environmental uncertainty, the more enterprises with a high degree of digital transformation can promote the information efficiency of the capital market. Additional analysis showed that the promotional effect of digital transformation on the information efficiency of the capital market is better for non-state-owned enterprises and small and medium-sized enterprises. This study provides detailed insights into digital transformation and capital market information efficiency, which enriches the research related to the economic consequences of digital transformation and demonstrates the theoretical and practical value of corporate digital transformation.

CSRC’s random inspection and capital market information efficiency: an empirical evidence from stock price synchronicity

ABSTRACT The random inspection of the China Securities Regulatory Commission (CSRC) is an important policy for practicing “standardizing regulatory behavior and innovating management modes”. This study investigates how CSRC’s random affect capital market information efficiency from the perspective of stock price synchronicity. Using a sample of China’s non-financial A-share firms from 2013 to 2019, we find that random inspections significantly reduced the stock price synchronicity of inspected firms. Random inspections could increase the probability of releasing management earnings forecasts, media coverage and investor attention, and thereby improve information efficiency. Further study finds that the effect of random inspections on stock price synchronicity is stronger for non-state controlled firms, districts with more listed firms, and districts with more transparent government. This study enriches the literature on the consequences of random inspections and extends our knowledge of the relationship between regulatory innovations and the information efficiency of the capital market.

Revolutionizing Chinese Manufacturing: Uncovering the Nexus of Intelligent Transformation and Capital Market Information Efficiency

Intelligent transformation plays a crucial role in advancing sustainable development in manufacturing while also enhancing the information environment. This study examines the role of intelligent transformation in China’s manufacturing sector, spanning theoretical and empirical dimensions and being anchored in the context of capital market information efficiency. The theoretical framework highlights how intelligent transformation mitigates information asymmetry, aligning a firm’s valuation with its intrinsic value, thereby elevating the information efficiency of capital markets. Leveraging annual reports from China’s A-share manufacturing firms, this study employs textual analysis to construct indicators assessing the extent of intelligent transformation across these entities. The empirical findings of this study harmonize with the theoretical constructs. Notably, intelligent transformation emerges as a pivotal driver in enhancing information efficiency in capital markets, substantiated by a negative correlation between intelligent transformation and stock price synchronicity within the manufacturing domain. This correlation withstands a battery of robustness tests and endogeneity treatment. The mechanism driving this transformative impact lies in intelligent transformation’s ability to enhance productivity and magnify market attention, thereby positively influencing capital market information efficiency. The insights not only provide empirical support but also offer practical guidance for improving real-world company operations and developing high-quality capital markets.

The dynamics of market efficiency of major cryptocurrencies

The exponential growth of Fintech innovation has increased the interest in cryptocurrency market informational efficiency given that cryptocurrencies and their underlying blockchain technology represent a profound yet ambiguous facet of Fintech. In this context, this paper examines the dynamic changes in the market efficiency of six major cryptocurrencies using the multifractal detrended fluctuation analysis (MFDFA) approach. The empirical findings confirm a varying degree of multifractal strength in the cryptocurrencies under consideration, which could be related to market inefficiency and fractal market hypothesis verification. Based on the multifractal indices, Bitcoin and Litecoin are the two most inefficient cryptocurrencies, whereas Cardano and Binance Coin exhibit the least inefficiency. Ripple and Ethereum remain in the middle. Overall, the cryptocurrencies exhibit persistence behaviour but show a significant change over time. Finally, we perform a rolling-window analysis and confirm the presence of multifractality, which seems to vary over time, suggesting that market (in)efficiency is an evolving process that can be shaped by market conditions. We argue that these findings could be related to herding behaviour, especially during crisis periods. The findings have policy implications, including the possibility of using active trading for profit-making strategies.

INFORMATION EFFICIENCY IN THE U.S. AND SHARIAH-COMPLAINT STOCKS IN MALAYSIA DURING COVID-19

This study examines the impact of analysts’ forecast of market liquidity and information efficiency in the U.S (developed) and Malaysia (emerging – Shariah-compliant stocks) before and during COVID-19.  The results show that the analysts’ forecast is significant to the market liquidity in the pre-COVID period but its influence diminishes during the COVID-19. Moreover, the impact of the analysts’ forecast is significant in the upper quantiles (0.7 and 0.9 quantiles) of the U.S market and in the lower quantiles (0.1 and 0.3 quantiles) of Malaysia's Islamic market. Similarly, the buy-sell recommendations in the U.S market and all variables forecasted are significant before COVID-19. Both markets become inefficient during COVID-19, and analysts’ forecast is no longer correlated to information efficiency. These results inform practitioners and investors to inspect the market conditions and investor's behavior under market stress such as COVID-19, which has disrupted the international financial markets.

Symbolic Encoding Methods with Entropy-Based Applications to Financial Time Series Analyses.

Symbolic encoding of information is the foundation of Shannon's mathematical theory of communication. The concept of the informational efficiency of capital markets is closely related to the issue of information processing by equity market participants. Therefore, the aim of this comprehensive research is to examine and compare a battery of methods based on symbolic coding with thresholds and the modified Shannon entropy in the context of stock market efficiency. As these methods are especially useful in assessing the market efficiency in terms of sequential regularity in financial time series during extreme events, two turbulent periods are analyzed: (1) the COVID-19 pandemic outbreak and (2) the period of war in Ukraine. Selected European equity markets are investigated. The findings of empirical experiments document that the encoding method with two 5% and 95% quantile thresholds seems to be the most effective and precise procedure in recognizing the dynamic patterns in time series of stock market indices. Moreover, the Shannon entropy results obtained with the use of this symbolic encoding method are homogenous for all investigated markets and unambiguously confirm that the market informational efficiency measured by the entropy of index returns decreases during extreme event periods. Therefore, we can recommend the use of this STSA method for financial time series analyses.

The Impact of Corporate Public Market Share Repurchases on Capital Market Information Efficiency

ABSTRACT Combining data on share repurchases conducted by Chinese listed companies in the public market, this study explores the impact of corporate share repurchases on capital market information efficiency. The research results show that share repurchases effectively improve the information efficiency of the capital market. The mechanism test finds that share repurchases improve the capital market information efficiency by increasing stock liquidity and improving the market information environment. In addition, the heterogeneity test finds that the positive impact of share repurchases on the information efficiency of the capital market is more significant after the launch of the new Company Law in 2018 and in a bear market. Overall, this study provides a theoretical reference on the government’s efforts to improve the basic capital market system with the aim of high-quality capital market development.

How does liberalization affect emerging stock markets? Theories and empirical evidence

AbstractThis paper reviews the literature that discusses how liberalization affects emerging stock markets on the cost of equity, stock volatility, stock liquidity, and informational efficiency. The survey consists of two parts, theoretical arguments and empirical evidence. Four primary mechanisms explaining the impacts are risk diversification, information‐sharing, friction channel, and market competition. Our survey indicates that liberalization was evidenced to reduce the cost of equity (via risk diversification mechanism), stabilize stock volatility (mainly through risk diversification mechanism), increase stock market liquidity (in both friction channels and informational‐sharing mechanisms), and improve the local market's informational efficiency (by informational‐sharing mechanism). Also, we suggest some aspects of theoretical arguments that still need further examination by empirical research.

Firm-Specific Investor Sentiment, Confirmation Bias, and Market Response to Earnings Information

Purpose - This study investigates the effect of firm-specific investor sentiment on the asymmetry of the market’s response to signed earnings of accounting information (i.e., positive/negative unexpected earnings). Applying cognitive attribution (i.e., confirmation bias), which arises due to the incongruency of prior and new information to market earning reactions, this paper aims to provide another insight into the market’s efficiency of accounting information.
 Design/Methodology/Approach - This study hypothesizes that firm-specific investor sentiment is associated with market reactions to earnings information. Using 4,802 firm-year observations of KSE listed firms from 2011 to 2018, this study conducts a series of multiple regression analyses that estimate the moderate/ incremental effect of investor sentiment on market earnings responses.
 Findings - The analysis results show that on average, firm-specific sentiment plays a role as a reference in interpreting subsequent earnings information. This leads investors to under-react to signed earnings at the announcement date, relying on the sentiment level.
 Research Implications - This study is distinct from prior literature in using individual firm investor sentiment deemed to be relatively faithful for representing the external mood of firms. By linking the market’s earnings response with investor cognitive attribution (i.e., confirmation bias), this study looks more closely into market informational efficiency.

Three Major Crises and Asian Emerging Market Informational Efficiency: A Case of Pakistan Stock Exchange-100 Index

Periods of economic turmoil distort the ability of stock prices to reflect the available information. In the last three decades, emerging markets experienced numerous crises. The major three of them are the Asian Financial Crisis (1997–1998), Global Financial Crisis (2007–2009) and Global Pandemic Crisis (2020–2022). The nature, intensity and duration of these crises differ significantly. This study investigates the impact of these varying natures of crises on the level of informational efficiency. The empirical evidence is based on the emerging stock market of Pakistan. Index-level data are collected from Pakistan Stock Exchange-100 Index for the period 1995–2022. The rebalancing is done each year to ensure that the final sample is composed of only 100 stocks with the highest market capitalization. The results based on the Variance Ratio (VR) test show that informational efficiency is time-varying. Among all the three crises, informational efficiency deters more in the COVID-19 pandemic, albeit the market efficiency recovers soon. This implies that the arbitrage opportunity is marginal in crisis periods, while investors prefer to invest in post-crisis periods. Finally, our results reveal that among all the crises, investors were more informed in the Global Financial Crisis. Investors must keep a close eye on market regimes for designing investment solutions.

Institutional investors' site visits, market attention, and stock market information efficiency—Evidence from stock price synchronicity

AbstractAs external governance factors, institutional investors' governance mechanisms and governance effect have been focus areas of research. Based on the data of A‐share listed companies in the Shenzhen Stock Exchange from 2013 to 2019, this study discusses the impact of institutional investors' site visits on capital market information efficiency. The study finds that institutional investors' site visits can significantly reduce stock price synchronicity, indicating the potential of site visits to improve capital market information efficiency. Market attention can play an amplifying role in the relationship between institutional investors' site visits and stock price synchronicity, which manifests as their sensitivity enhancement. Further, institutional investors' site visits are more effective for reducing stock price synchronicity in non‐state‐owned enterprises and those in areas with low marketization. Moreover, institutional research increases information asymmetry between investors. This study demonstrates the positive role of institutional research from the perspective of capital market information efficiency and confirms the effectiveness of institutional investors as external governance factors.

Impact of Market Information Efficiency on Corporate Listing and Financing: Evidence from China

In this paper, we examine the impact of China’s capital market information efficiency on enterprise listing and financing. The results reveal the following: (1) High-efficiency market information sharing leads reduced enterprise equity financing costs and waiting times for enterprise listing and to an increased willingness of investors to invest. These effects increase the proportion of domestic financing for Chinese companies and the proportion of domestic listings. (2) Compared with non-crisis periods, market information efficiency did not affect the listing and financing of Chinese enterprises during the US subprime mortgage crisis, and its promotion effect declined during the global financial crisis and European debt crisis. (3) The promotion effect of market information efficiency on enterprise listing and financing is strengthened by the cross listing of enterprise AB and AH shares. (4) The impact of market information efficiency is more significant for private enterprises than for state-owned enterprises.

Modeling Momentum and Reversals

Stock prices are well known to exhibit behaviors that are difficult to model mathematically. Individual stocks are observed to exhibit short term price reversals and long term momentum, while their industries only exhibit momentum. Here we show that individual stocks can be modeled by simple mean reverting processes in such a way that these behaviors are captured, the model is arbitrage free, and market informational efficiency is preserved. Simulation shows that in such a market, when mean reversion is sufficiently high, strategies which use reversals would substantially outperform buy and hold strategies.

Do Firm‐Specific Stock Price Crashes Lead to a Stimulation or Distortion of Market Information Efficiency?*

ABSTRACTUnlike prior research that focuses on determinants of firm‐specific stock price crashes (SPCs), we study the consequences of SPCs on market information efficiency. The tension underlying our research question stems from two competing explanations. As an unanticipated shock, an SPC could stimulate (distort) information efficiency by triggering investor rational attention (opinion divergence). Our identification strategy involves a difference‐in‐differences analysis in which SPC firms in the treatment sample are propensity score matched with non‐SPC firms in the industry‐peer control sample, as well as placebo tests for falsification. Consistent with the stimulation effect, we find an increase of the earnings response coefficient and a decrease in post‐earnings announcement drift, from the pre‐ to post‐SPC period, for SPC firms, but not for non‐SPC firms. Further analyses reveal that SPC firms attract increased investor attention, as reflected in greater analyst coverage and more investor access to firms' online financial filings following such an event. Using mutual fund flow redemption pressure based on hypothetical sales as an exogenous shock to SPCs, we provide evidence corroborating our causal interpretation of the main findings. Collectively, the evidence suggests that SPCs can attract increased investor attention, bringing about positive externalities by stimulating market information efficiency.

Retail Traders and Market Informational Efficiency: Evidence From Distractive TV Events

Retail Traders and Market Informational Efficiency: Evidence From Distractive TV Events

Equity Market Uncertainty and Informational Efficiency

Equity Market Uncertainty and Informational Efficiency

The adaptive market hypothesis and high frequency trading

This paper uses NASDAQ order book data for the S&P 500 exchange traded fund (SPY) to examine the relationship between one-minute, informational market efficiency and high frequency trading (HFT). We find that the level of efficiency varies widely over time and appears to cluster. Periods of high efficiency are followed by periods of low efficiency and vice versa. Further, we find that HFT activity is higher during periods of low efficiency. This supports the argument that HFTs seek profits and risk reduction by actively processing information, through limit order additions and cancellations, during periods of lower efficiency and revert to more passive market-making and rebate-generation during periods of higher efficiency. These findings support the argument that the adaptive market hypothesis (AMH) is an appropriate description of how prices evolve to incorporate information.

Inquiry letter supervision and stock price informativeness-research based on the stock price non-synchronicity

ABSTRACT Based on the sample of listed companies in China, this paper discusses the impact of the annual report inquiry letter sent by stock exchanges on stock price informativeness. Research results show that the inquiry letter increases the stock price non-synchronicity, indicating a positive impact of the inquiry letter on stock price informativeness. This effect is more pronounced for companies with low information transparency and poor corporate governance, suggesting that inquiry letter increases stock price informativeness through the information channel and governance channel. The positive impact of inquiry letter on stock price informativeness is affected by the frequency of receiving inquires, whether accounting firms are required to express verification opinions and the number of questions in the inquiry. Results of this paper support the positive role of inquiry letter in improving market information efficiency.