Stock Return Synchronicity Research Articles

Principles vs. Rules and the Information Environment: The Case of SFAS 95

We provide evidence on the “principles vs. rules” standards debate by examining how changes in cash flow reporting methods required by SFAS 95 Statement of Cash Flows affected firms’ information environments. We argue that adoption of SFAS 95 represented a change from a principle based standard (APB 19) to a rules based standard. Using a difference-in-difference research design, we find for firms required to adopt its provisions (mandatory switchers), SFAS 95 resulted in a deterioration in their information environments, as evidenced by increases in bid-ask spreads and stock return synchronicity as well as decreases in trading volume and analyst coverage. Firms with richer information environments exhibit a mitigated response. Information environments deteriorated more when cash flow information is arguably more important. In addition, the evidence does not indicate the deterioration is mitigated when firms are in industries that experienced greater increases in industry reporting conformity. Together, these findings are consistent with firms, on average, using their reporting discretion to convey private information to investors.

Information Processing Cost and Stock Return Synchronicity - Evidence from XBRL Adoption

Information Processing Cost and Stock Return Synchronicity - Evidence from XBRL Adoption

Do star analysts know more firm-specific information? Evidence from China

Using a unique database in China, we extend the literature to further distinguish the information production role of star vs. non-star analysts. We confirm the general conclusion of a positive association between analyst coverage and stock return synchronicity measured by a firm’s R2 in China. The findings from star analysts, however, show that star analyst coverage actually decreases stock return synchronicity. We contend that the firm-specific human capital in star analysts helps the analysts overcome the challenges of information production in an emerging market. The superior firm-specific human capital argument of star analysts is further supported by the negative association of star analysts’ firm-specific experiences and stock return synchronicity. Our conclusions are robust to different specifications of star analyst presence and different definitions of analysts’ firm-specific experiences. We also find that star analysts exhibit a more accurate earnings forecast than non-star analysts.

Analyst Initiations of Coverage and Stock Return Synchronicity

ABSTRACT We examine how the information produced by analysts when they initiate coverage contributes to the mix of firm-specific, industry-, and market-wide information available about the firm. We hypothesize that the first analyst to initiate coverage provides low-cost market and industry information allowing him/her to follow more stocks, whereas subsequent analysts provide firm-specific information to distinguish themselves from existing analysts. We use stock return synchronicity to measure the mix of information available about a firm, with higher synchronicity indicating more industry and market information. Coverage initiations of firms with no prior analyst coverage increase synchronicity, suggesting that analysts produce industry- and market-wide information. In contrast, analysts initiating coverage on firms with existing coverage appear to focus on producing firm-specific information as these initiations lead to reduced synchronicity. Together, our findings indicate that the type of information that analysts produce at initiation depends on the information provided by other analysts. Data Availability: All data are available from public sources identified in the paper.

Transparency, Price Informativeness, and Stock Return Synchronicity: Theory and Evidence

AbstractThis paper argues that, contrary to the conventional wisdom, stock return synchronicity (or R2) can increase when transparency improves. In a simple model, we show that, in more transparent environments, stock prices should be more informative about future events. Consequently, when the events actually happen in the future, there should be less “surprise” (i.e., less new information is impounded into the stock price). Thus a more informative stock price today means higher return synchronicity in the future. We find empirical support for our theoretical predictions in 3 settings: namely, firm age, seasoned equity offerings (SEOs), and listing of American Depositary Receipts (ADRs).

Investor Sentiment, Arbitrage Constraints and Stock Return Synchronicity

Investor Sentiment, Arbitrage Constraints and Stock Return Synchronicity

Mandatory IFRS Reporting and Stock Price Informativeness

In this paper, we examine whether mandatory adoption of IFRS influences the flow of firm-specific information and contributes to stock price informativeness as measured by stock return synchronicity. Using a constant sample of 1,904 mandatory IFRS adopters in 14 EU countries for the period 2003-2007, we find a V-shaped pattern in synchronicity around IFRS adoption, which is consistent with IFRS disclosures revealing new firm-specific information in the adoption period (i.e., a reduction of synchronicity) and subsequently lowering the surprise of future disclosures (i.e., an increase in synchronicity). We also find mandatory IFRS adoption increases analysts’ ability to incorporate industry-level information into stock price. However, we are unable to detect a reduction in the private information advantage enjoyed by institutional owners post-IFRS adoption. Moreover, we find the synchronicity effects to be more pronounced for firms in countries with larger differences in local GAAP relative to IFRS. Overall, our evidence yields novel insights on the consequences of mandatory IFRS adoption by investigating its effect on stock price informativeness and the distinctive roles played by a firm’s information environment.

Block ownership and firm-specific information

This study examines the impact of block ownership on the firm’s information environment. Previous research shows that stock price efficiency depends on the cost of acquiring private information, as well as on the precision of this information. Blockholders have a clear advantage over diffuse, atomistic shareholders in terms of the precision and acquisition cost of their private information. We hypothesize that this informational advantage will manifest itself primarily in the firm-specific component of stock returns. Our empirical findings confirm that blockholders increase the probability of informed trading and idiosyncratic volatility, and decrease the firm’s stock return synchronicity. These results hold for both inside and outside blockholders, but are insignificant for blocks controlled by employee stock ownership plans (ESOPs). Overall, our findings support the contention that ownership structure plays a significant role in shaping the firm’s information environment.

The Influence of Analysts, Institutional Investors, and Insiders on the Incorporation of Market, Industry, and Firm-Specific Information into Stock Prices

We investigate the extent to which the trading and trade-generating activities of three informed market participants—financial analysts, institutional investors, and insiders—influence the relative amount of firm-specific, industry-level, and market-level information impounded into stock prices, as measured by stock return synchronicity. We find that stock return synchronicity is positively associated with analyst forecasting activities, consistent with analysts increasing the amount of industry-level information in prices through intra-industry information transfers. In contrast, stock return synchronicity is inversely related to insider trades, consistent with these transactions conveying firm-specific information. Supplemental tests show that insider and institutional trading accelerate the incorporation of the firm-specific component of future earnings news into prices alone, while analyst forecasting activity accelerates both the industry and firm-specific component of future earnings news. Our results suggest that all three parties influence the firm's information environment, but the type of price-relevant information conveyed by their activities depends on each party's relative information advantage.

The Influence of Analysts, Institutional Investors, and Insiders on the Incorporation of Market, Industry, and Firm-Specific Information into Stock Prices

We investigate the extent to which the trading and trade-generating activities of three informed market participants -- financial analysts, institutional investors, and insiders -- influence the relative amount of firm-specific, industry-level and market-level information impounded into stock prices, as measured by stock return synchronicity. We find that stock return synchronicity is positively associated with analyst forecasting activities, consistent with analysts increasing the amount of industry-level information in prices through intra-industry information transfers. In contrast, stock return synchronicity is inversely related to insider trades, consistent with these transactions conveying firm-specific information. Supplemental tests show that insider and institutional trading accelerate the incorporation of the firm-specific component of future earnings news into prices alone, while analyst forecasting activity accelerates both the industry and firm-specific component of future earnings news. Our results suggest that all three parties influence the firm's information environment, but the type of price-relevant information conveyed by their activities depends on each party's relative information advantage.