IDEAS home Printed from https://ideas.repec.org/a/eee/joecas/v21y2020ics1703494919300751.html
   My bibliography  Save this article

Corporate events, return synchronicity and price efficiency

Author

Listed:
  • Li, Fengyun
  • Petsas, Iordanis
  • Cai, Jinghan

Abstract

This paper examines a dilemma in the relationship between R2 and price efficiency: After comprehensively studying the R2 change around 7 well-known corporate events using Hong Kong stock market data, neither the traditional understanding of R2 as price inefficiency, nor the behavioral viewpoint of R2 as price efficiency can explain the observed R2 change around the events. We adopt an alternative methodology to replace the standard difference-in-difference regression and directly decompose the R2 change. We find that, due to the endogeneity of events, the changes of R2 are over-estimated. We further propose that in the event study setting, the R2 change may be simply the consequence of the inflow/outflow of some trend-chasing investors, and it may be detached from price (in)efficiency. Empirical evidence is consistent with this hypothesis.

Suggested Citation

  • Li, Fengyun & Petsas, Iordanis & Cai, Jinghan, 2020. "Corporate events, return synchronicity and price efficiency," The Journal of Economic Asymmetries, Elsevier, vol. 21(C).
    • Handle: RePEc:eee:joecas:v:21:y:2020:i:c:s1703494919300751
    DOI: 10.1016/j.jeca.2019.e00136
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S1703494919300751
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jeca.2019.e00136?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Kenourgios, Dimitris & Asteriou, Dimitrios & Samitas, Aristeidis, 2013. "Testing for asymmetric financial contagion: New evidence from the Asian crisis," The Journal of Economic Asymmetries, Elsevier, vol. 10(2), pages 129-137.
    2. Theologos Dergiades & Costas Milas & Theodore Panagiotidis, 2015. "Tweets, Google trends, and sovereign spreads in the GIIPS," Oxford Economic Papers, Oxford University Press, vol. 67(2), pages 406-432.
    3. Chen, Crystal Xiaobei & Rhee, S. Ghon, 2010. "Short sales and speed of price adjustment: Evidence from the Hong Kong stock market," Journal of Banking & Finance, Elsevier, vol. 34(2), pages 471-483, February.
    4. Gervais, Simon & Odean, Terrance, 2001. "Learning to be Overconfident," Review of Financial Studies, Society for Financial Studies, vol. 14(1), pages 1-27.
    5. Wurgler, Jeffrey, 2000. "Financial markets and the allocation of capital," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 187-214.
    6. Lakonishok, Josef & Lev, Baruch, 1987. "Stock Splits and Stock Dividends: Why, Who, and When," Journal of Finance, American Finance Association, vol. 42(4), pages 913-932, September.
    7. Jin, Li & Myers, Stewart C., 2006. "R2 around the world: New theory and new tests," Journal of Financial Economics, Elsevier, vol. 79(2), pages 257-292, February.
    8. Patrick J. Kelly, 2014. "Information Efficiency and Firm-Specific Return Variation," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 4(04), pages 1-44.
    9. Copeland, Thomas E, 1979. "Liquidity Changes Following Stock Splits," Journal of Finance, American Finance Association, vol. 34(1), pages 115-141, March.
    10. Jinghan Cai & Jia He & Jibao He & Weili Zhai, 2019. "Individual Investors and R^2," Economics Bulletin, AccessEcon, vol. 39(1), pages 159-165.
    11. Cai, Jinghan & Xia, Le, 2014. "When R2 meets the short-sales constraints," Economics Letters, Elsevier, vol. 125(3), pages 336-339.
    12. Holderness, Clifford G. & Pontiff, Jeffrey, 2016. "Shareholder nonparticipation in valuable rights offerings: New findings for an old puzzle," Journal of Financial Economics, Elsevier, vol. 120(2), pages 252-268.
    13. Gustavo Grullon, 2004. "Advertising, Breadth of Ownership, and Liquidity," The Review of Financial Studies, Society for Financial Studies, vol. 17(2), pages 439-461.
    14. Shuo Kan & Stephen Gong, 2018. "Does High Stock Return Synchronicity Indicate High or Low Price Informativeness? Evidence from a Regulatory Experiment," International Review of Finance, International Review of Finance Ltd., vol. 18(4), pages 523-546, December.
    15. Artyom Durnev & Randall Morck & Bernard Yeung & Paul Zarowin, 2003. "Does Greater Firm‐Specific Return Variation Mean More or Less Informed Stock Pricing?," Journal of Accounting Research, Wiley Blackwell, vol. 41(5), pages 797-836, December.
    16. Peress, Joel, 2010. "The tradeoff between risk sharing and information production in financial markets," Journal of Economic Theory, Elsevier, vol. 145(1), pages 124-155, January.
    17. French, Kenneth R. & Roll, Richard, 1986. "Stock return variances : The arrival of information and the reaction of traders," Journal of Financial Economics, Elsevier, vol. 17(1), pages 5-26, September.
    18. Chuang, Wen-I & Susmel, Rauli, 2011. "Who is the more overconfident trader? Individual vs. institutional investors," Journal of Banking & Finance, Elsevier, vol. 35(7), pages 1626-1644, July.
    19. Diamond, Douglas W. & Verrecchia, Robert E., 1987. "Constraints on short-selling and asset price adjustment to private information," Journal of Financial Economics, Elsevier, vol. 18(2), pages 277-311, June.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Zhang, Wei & Li, Xiao & Shen, Dehua & Teglio, Andrea, 2016. "R2 and idiosyncratic volatility: Which captures the firm-specific return variation?," Economic Modelling, Elsevier, vol. 55(C), pages 298-304.
    2. Ahmad Fraz & Arshad Hassan, 2017. "Stock Price Synchronicity and Information Environment," Business & Economic Review, Institute of Management Sciences, Peshawar, Pakistan, vol. 9(4), pages 213-232, December.
    3. Patrick J. Kelly, 2014. "Information Efficiency and Firm-Specific Return Variation," Quarterly Journal of Finance (QJF), World Scientific Publishing Co. Pte. Ltd., vol. 4(04), pages 1-44.
    4. Li, Mingsheng & Liu, Desheng & Peng, Hongfeng & Zhang, Luxiu, 2020. "Does low synchronicity mean more or less informative prices? Evidence from an emerging market," Journal of Financial Stability, Elsevier, vol. 51(C).
    5. Peng, Lin & Xiong, Wei, 2006. "Investor attention, overconfidence and category learning," Journal of Financial Economics, Elsevier, vol. 80(3), pages 563-602, June.
    6. Lin, Mei-Chen & Wu, Chu-Hua & Chiang, Ming-Ti, 2014. "Investor attention and information diffusion from analyst coverage," International Review of Financial Analysis, Elsevier, vol. 34(C), pages 235-246.
    7. Li, Hao & Li, Zhisheng & Lin, Bingxuan & Xu, Xiaowei, 2019. "The effect of short sale constraints on analyst forecast quality: Evidence from a natural experiment in China," Economic Modelling, Elsevier, vol. 81(C), pages 338-347.
    8. Li, Fengyu & Liu, Mark H. & Shi, Yongdong (Eric), 2017. "Institutional ownership around stock splits," Pacific-Basin Finance Journal, Elsevier, vol. 46(PA), pages 14-40.
    9. repec:zbw:bofrdp:2012_016 is not listed on IDEAS
    10. Francis, Bill & Hasan, Iftekhar & Song, Liang & Yeung, Bernard, 2012. "What determines bank stock price synchronicity? Global evidence," Bank of Finland Research Discussion Papers 16/2012, Bank of Finland.
    11. Beuselinck, C.A.C. & Joos, P.P.M. & Khurana, I.K. & van der Meulen, S., 2010. "Mandatory IFRS Reporting and Stock Price Informativeness," Discussion Paper 2010-82, Tilburg University, Center for Economic Research.
    12. Hou, Kewei & Peng, Lin & Xiong, Wei, 2006. "R2 and Price Inefficiency," Working Paper Series 2006-23, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    13. Doan, Anh-Tuan & Lin, Kun-Li, 2022. "Bank ownership and stock price informativeness. Does politics matter?," International Review of Financial Analysis, Elsevier, vol. 79(C).
    14. Francis, Bill & Hasan, Iftekhar & Song, Liang & Yeung, Bernard, 2012. "What determines bank stock price synchronicity? : Global evidence," Research Discussion Papers 16/2012, Bank of Finland.
    15. Dang, Tung Lam & Moshirian, Fariborz & Zhang, Bohui, 2015. "Commonality in news around the world," Journal of Financial Economics, Elsevier, vol. 116(1), pages 82-110.
    16. Ramzi Boussaidi, 2022. "Implications of the overconfidence bias in presence of private information: Evidence from MENA stock markets," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 27(3), pages 3660-3678, July.
    17. Kee-Hong Bae & Jin-Mo Kim & Yang Ni, 2013. "Is Firm-specific Return Variation a Measure of Information Efficiency?," International Review of Finance, International Review of Finance Ltd., vol. 13(4), pages 407-445, December.
    18. Yunsen Chen & Jianqiao Huang & Xiao Li & Qingbo Yuan, 2022. "Does stock market liberalization improve stock price efficiency? Evidence from China," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(7-8), pages 1175-1210, July.
    19. Moonsoo Kang & Kiseok Nam, 2015. "Informed trade and idiosyncratic return variation," Review of Quantitative Finance and Accounting, Springer, vol. 44(3), pages 551-572, April.
    20. Wang, Wei & Cheng, Sijia & Nahar, Shamsun & Alhaleh, Shadi Emad Areef & Wang, Hua, 2022. "Does mixed-ownership reform restrain stock price synchronicity? Evidence from China," Economic Analysis and Policy, Elsevier, vol. 73(C), pages 390-404.
    21. Haga, Jesper & Högholm, Kenneth & Sundvik, Dennis, 2022. "Peer firms’ reporting frequency and stock price synchronicity: European evidence," Journal of International Accounting, Auditing and Taxation, Elsevier, vol. 49(C).

    More about this item

    Keywords

    R2 Price efficiency; Information asymmetry; Short selling; Stock split; Return synchronicity;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:joecas:v:21:y:2020:i:c:s1703494919300751. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: https://www.journals.elsevier.com/the-journal-of-economic-asymmetries/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.