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

Published online by Cambridge University Press:  20 August 2010

Sudipto Dasgupta ,
Jie Gan  and
Ning Gao
Sudipto Dasgupta
Affiliation:
Department of Finance, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong. dasgupta@ust.hk.
Jie Gan
Affiliation:
Department of Finance, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong. jgan@ust.hk.
Ning Gao
Affiliation:
Manchester Accounting and Finance Group, Manchester Business School, University of Manchester, Booth Street West, Manchester, M15 6PB, United Kingdom. ning.gao@mbs.ac.uk.
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Abstract

This 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).

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 45 , Issue 5 , October 2010 , pp. 1189 - 1220
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2010

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