Stock Price Discovery Research Articles

Wisdom of crowds or awkward squad? Social interaction and the information efficiency of the Chinese capital market

Existing studies on the impact of social media on the information efficiency of capital markets have opposing views. One often-overlooked aspect in these studies is the role of investor interaction, a core feature of social media. To address this gap, we employ social network analysis (SNA) to investigate how investor interactions on Eastmoney, China's largest online stock forum, influence capital market efficiency. Our findings indicate that online investor communication can effectively disseminate firm-specific information through social networks when investor interactions are at a moderate level. However, beyond a certain threshold, heightened interactions contribute to market noise, thereby distorting the stock price discovery process. Our mechanistic analysis reveals that increased investor interactions stimulate irrational emotions at both market and stock levels, ultimately impairing capital market efficiency. This study contributes to social network analysis and behavioral finance by illuminating the impact of online social interactions among retail investors on capital market information efficiency.

Does express delivery run ahead of stock price?

Abstract We study the role of logistics information in the stock price discovery process. Using a proprietary dataset on parcel-level express delivery service records from one of the largest express service providers in China, we find that express delivery contains firm-specific information for stock pricing. A long/short portfolio of buying (selling) stocks with high (low) quarterly growth in the number of parcels sent by firms generates an 8.23 percent risk-adjusted annual return. The return predictability is more significantly driven by document, light, and business-to-business parcels, which reflects the intensity of a firm’s overall operations (rather than just sales growth), and by parcels sent to new addresses, which represents new business expansion. Echoing this return predictability, parcel growth also predicts firm growth, profitability, and earnings surprises. Finally, we provide evidence on return predictability associated with topology of logistic network identified by parcel delivery data.

Media Recommendation and Market Risk: Evidence from Chinese Market

This study analyzes 23,292 TikTok short-video stock recommendations from 2022 to explore their impact on stock market performance using the Difference-In-Differences Model. Key findings include: (1) short video recommendations provide valuable information, significantly boosting stock price discovery; (2) using a large language model (ChatGPT), it was found that the impact of clustered recommendations on stock price discovery is enhanced when considering recommendation strength. This pioneering research offers insights into the relationship between short-video stock recommendations and abnormal stock returns, benefiting researchers, investors, corporations, and social media analysts.

Do Companies Redact Material Information from Confidential SEC Filings? Evidence from the FAST Act

ABSTRACT The Securities and Exchange Commission permits companies to redact proprietary information from material contract filings, so long as the redacted information (1) would cause competitive harm if disclosed, and (2) the information is legally immaterial. Because these joint criteria are inherently contradictory, we examine whether legally immaterial redacted information is economically material to investors. We find that firms’ stock price discovery process is significantly slower and insider trading is significantly greater after companies file redacted contracts compared to nonredacted contracts. We then examine the impact of the 2019 FAST Act, which reduced the SEC’s oversight of redacted contracts. Companies redact more frequently and insider trading (but not speed of stock price discovery) is more pronounced after the FAST Act. Taken together, these findings suggest that at least some redacted information is economically material to investors and that reducing SEC oversight of redacted information may not be in investors’ best interests. JEL Classifications: M41.

Firms’ Tweets and Stock Price Discovery

Firms’ Tweets and Stock Price Discovery

Back to the futures: When short selling is banned

We examine the effect of single-stock futures (SSFs) trading on the price discovery and market quality of underlying stocks during the 2008 short-selling ban in the United States. We find a significant increase in SSFs trading volume for banned stocks during the ban period. We show that the contribution of SSFs trading to underlying stock price discovery also increased significantly. Moreover, SSFs trading helped mitigate the negative effect of the short-selling ban on market quality. Although SSFs trading in the U.S. still lags other countries, our findings project an increasingly important role for them in the U.S. financial market.

Shorting Activity and Stock Return Predictability: Evidence From a Mandatory Disclosure Shock

We study the effect of a mandatory improvement in public disclosure due to the adoption of International Financial Reporting Standards (IFRS) on the stock return predictability of shorting activity. To assess the impact of the disclosure shock, we measure monthly changes in the demand for and supply of stocks for shorting and whether those changes predict negative returns in the following month. We provide international evidence that the ability of increases in shorting demand and supply to predict negative returns declines after the shock. The predictive ability of shorting in the month before a negative earnings surprise and news of a firm’s questionable M&A transaction also declines after the shock. These findings imply that the shock of the mandatory accounting change crowds out some of short-sellers’ value-relevant information in the equity lending market. Thus, while the democratization of information from a structured accounting change may make sophisticated investors worse off by reducing their ability to predict future returns, this change may also benefit all investors through timely stock price discovery.

Shorting activity and stock return predictability: Evidence from a mandatory disclosure shock

AbstractWe study the effect of a mandatory improvement in public disclosure due to the adoption of International Financial Reporting Standards (IFRS) on the stock return predictability of shorting activity. To assess the impact of the disclosure shock, we measure monthly changes in the demand for and supply of stocks for shorting and whether those changes predict negative returns in the following month. We provide international evidence that the ability of increases in shorting demand and supply to predict negative returns declines after the shock. The predictive ability of shorting in the month before a negative earnings surprise and news of a firm's questionable merger and acquisitions transaction also declines after the shock. These findings imply that the shock of the mandatory accounting change crowds out some of short‐sellers’ value‐relevant information in the equity lending market. Thus, although the democratization of information from a structured accounting change may make sophisticated investors worse off by reducing their ability to predict future returns, this change may also benefit all investors through timely stock price discovery.

Does CSR Engender Trust? Evidence From Investor Reactions to Corporate Disclosures

We investigate whether a firm's corporate social responsibility (CSR) activities engender investor trust. Motivated by the observation that investor trust facilitates greater informational price efficiency, we address our question by examining the relation between CSR and three dimensions of stock price discovery: (1) the speed with which stock prices reflect earnings news, (2) the level of investor uncertainty around earnings announcements, and (3) earnings response coefficients. We find robust evidence that CSR enhances investor trust in firms. Specifically, we find that firms with more CSR enjoy faster incorporation of earnings news into stock prices, lower investor uncertainty around earnings announcements, and higher earnings response coefficients. Using a regression discontinuity design, we identify the causal effect of CSR on the speed with which stock prices reflect earnings news. Our inferences are robust to controls for characteristics of reported earnings and firms' information environment, as well as alternative measures of CSR.

The Price Impact of Same- and Opposing-Direction Herding by Institutions with Different Investment Horizons

This paper examines the price impact of the herding behaviour of short- and long-horizon institutional investors. We categorize the institutional herding as same-side herding when both types of institutions herd on the buy-side or sell- side together and as opposite-side herding when short-horizon institutions buy while the long-horizon institutions sell or vice versa. We find that the previously documented destabilizing impact of long-horizon institutional herding is only observed on opposite-side herding. Moreover, short-horizon institutional herding improves the stock price discovery process confirming the belief that they are more informed.

Information flow and price discovery dynamics

Non-homogeneous and time-varying information flow that affects the price discovery processes within and across markets is a common occurrence in reality but is often neglected in the literature of price discovery. To analyze such information flow within and across markets, we propose a new strategy with a new dynamic price discovery measure. We use this strategy to test the efficient home market hypothesis and the sector effect hypothesis based on the intraday data of the 115 stocks cross-listed and traded in the Canadian and U.S. stock markets. We find that the Canadian stock market is more efficient in price discovery for the Canadian stocks cross-listed in the U.S. stock market. A higher trading volume in the Canadian market makes price discovery in that market more efficient. The Canadian stock market is more efficient in price discovery for stocks in the basic materials sector but not in the technology and financial sectors. The NYSE Alternext is more efficient for junior stocks while the NASDAQ is more efficient for technology stocks.

Who Listens to Corporate Conference Calls? The Effect of 'Soft Information' on Institutional Trading

Conference calls provide a public venue through which stock analysts simultaneously interact, in large numbers, with firm management. Using a comprehensive database of transcribed U.S. corporate conference calls from 2006 to 2018, we find that institutional investors significantly react to the tone of calls in their trades and holdings of stocks. Institutions trade on the tone immediately, and up to four weeks after the call, and continue to trade on conference call-driven analyst recommendation revisions. The trade reaction of institutions to tone is more pronounced when the marginal value of information is higher, e.g., in the question section of the call, in earnings calls, and when the stock exhibits a higher degree of information asymmetry. Our paper suggests that conference calls are an important channel for stock price discovery in the post Reg-FD era.

The role of Exchange Traded Funds in the price discovery process of stocks listed on the Botswana Stock Exchange

In this paper we analyse the role of Exchange Traded Funds (ETFs) in the price discovery process of stocks listed at the Botswana Stock Exchange.Using daily returns data covering the period 3 January 2013 to 31 December 2015 for Beta Betta ETF and Domestic Company Indices, we utilize a VECM model to find out whether the Betta Beta ETF is playing a significant role in the price discovery process of stocks listed on the Botswana Stock Exchange. We found the error correction term to be statistically significant thereby confirming that the Beta Betta ETF is playing a significant role in the price discovery of stocks listed on the Botswana Stock Exchange.

Back to the Futures: When Short Selling is Banned

We examine the effect of single-stock futures (SSFs) trading on the price discovery and market quality of underlying stocks during the 2008 short-selling ban. We find a significant increase in SSFs trading volume for banned stocks during the ban period. We show that the contribution of SSFs trading to underlying stock price discovery also increased significantly. Moreover, we find that SSFs trading helped mitigate the negative effect of the short-selling ban on market quality. Given that SSFs trading in US still lags behind other countries, our findings project an increasingly important role of SSFs in the US financial market.

Patent Disclosure and Price Discovery

We focus in this study on the exogenous event of the enactment of American Inventor’s Protection Act of 1999 (AIPA), which disseminates timely, detailed, and credible public information on R&D activities through pre-grant patent disclosures. Exploiting the staggered timing of patent disclosures, we identify a significant improvement in the efficiency of stock price discovery. This improvement is stronger when patent disclosures reveal firms’ successful, new, or technologically valuable inventions. This improvement is more pronounced for firms in high-tech or fast-moving industries, or with a large institutional ownership or analyst coverage. We also find stock liquidity rises and investors’ risk perception of R&D drops after the enactment of AIPA. Our results highlight the importance of timely, detailed, and credible disclosures of R&D activities in alleviating the information problems faced by R&D-intensive firms.

What Information Do Firms Hide in Confidential SEC Filings?

U.S. public companies can redact information from required material contracts disclosures when management asserts that the information is immaterial and would cause competitive harm if publicly disclosed (i.e., it is proprietary). This study examines whether managers use this channel to withhold material information from investors. We find that firms’ stock price discovery process is significantly slower and insider trading is significantly greater after companies file redacted contracts compared with non-redacted contracts. Using data obtained under the Freedom of Information Act, we find that redacted material contracts withhold both quantitative and qualitative information and redacted information is predictably associated with insider trading. These findings suggest that at least some information redacted in material contracts is material to investors.

The more connected, the better? Impact of connectedness on volatility and price discovery in the Korean financial sector

PurposeThe purpose of this paper is to empirically analyze the effect of the increasing connectedness among financial institutions in the Korean financial market, as it affects the market microstructure in the stock market. Thus this work, first, analyzes the trend and characteristics of connectedness in the Korean financial sector. This work then demonstrates the impacts of connectedness on volatility and price discovery in the stock market.Design/methodology/approachThe entire Korean financial sector is analyzed from January 1990 to July 2015, including the periods of the 1997 Asian crisis and the 2007/2008 global financial crisis. This paper quantifies the connectedness between financial institutions using network methodology. Densely connectedness specifically refers to the cases in which a node experiences strong-lagged return spillover from and/or to itself.FindingsConnectedness is established as an important determinant of stock price discovery. This paper illustrates that connectedness increases on significant economic events such as the 1997 Asian crisis and the 2007/2008 global financial crisis. Furthermore, this paper demonstrates that the more densely connected a particular financial institution, the more volatile the stock price and the less accurate the stock price quality.Research limitations/implicationsUnderstanding the financial system from a network perspective has been on the rise after the 2007/2008 global financial crisis. This work helps regulators and policy makers understand the full implications of introducing new policies that can more closely connect financial institutions.Originality/valueThis paper precisely captures financial institutions’ connectedness by including all types of financial institutions at the micro level. Additionally, this paper links connectedness to market microstructure in the stock market.

Herding on Earnings News: The Role of Institutional Investors in Post–Earnings-Announcement Drift

We examine the role of institutional investors underlying post–earnings-announcement drift (PEAD). Our results show that while institutional investors generally herd on earnings news, such correlated trading among institutions does not eliminate or reduce market underreaction to earnings surprises. Instead, PEAD is significant only in the subsample of stocks where institutions herd in the same direction as earnings surprises. In fact, institutional herding is also positively related to next-quarter earnings announcement returns. We provide evidence that institutional herding on or against earnings news is largely driven by firm characteristics, particularly past firm performance and stock returns. In addition, we find that relative to nontransient institutions, transient institutions have a stronger tendency to herd on earnings information. Finally, based on long-run stock returns, we show that when institutions herd on earnings surprises, institutional trading represents a gradual process of incorporating information into stock prices. However, when institutions herd against earnings surprises, institutional trading slows down stock price discovery.

Herding on Earnings News: The Role of Institutional Investors in Post-Earnings-Announcement Drift

We examine the role of institutional investors underlying post-earnings-announcement drift (PEAD). Our results show that while institutional investors generally herd on earnings news, such correlated trading among institutions does not eliminate or reduce market underreaction to earnings surprises. Instead, PEAD is significant only in the subsample of stocks where institutions herd in the same direction as earnings surprises. In fact, institutional herding is also positively related to next-quarter earnings announcement returns. We provide evidence that institutional herding on or against earnings news is largely driven by firm characteristics, particularly past firm performance and stock returns. In addition, we find that relative to non-transient institutions, transient institutions have a stronger tendency to herd on earnings information. Finally, based on long-run stock returns, we show that when institutions herd on earnings surprises, institutional trading represents a gradual process of incorporating information into stock prices. On the other hand, when institutions herd against earnings surprises, institutional trading slows down stock price discovery.

Price Discovery in Voting and Non-Voting Stocks

When closely related assets like voting and non-voting stocks of a company are traded on the same exchange, it is of interest in which type of stock price discovery takes place first. Price discovery has not been analyzed for such strongly linked assets as voting and non-voting stocks which are traded on one exchange. This paper examines price discovery in voting and non-voting German stocks using the widely applied price discovery metrics information share developed by Hasbrouck (1995) and the common factor weights developed by Gonzalo and Granger (1995) and Harris, McInish, and Wood (2002). We show that non-voting stocks react earlier on average. Thus, we can conclude that voting rights do not enhance the process of price discovery. Further, there is evidence that price discovery does depend on the turnover of the stocks.