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Accounting Information Quality and the Clustering of Stock Prices

Author

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  • Baig , Ahmed

    (Lahore University of Management Sciences)

  • Blau , Ben

    (Utah State University)

  • Hao, Jie

    (Susquehanna University)

Abstract

The foundation of economic theory is based on the premise that prices will converge to their equilibrium value. However, prior research has documented that stock prices cluster on round pricing increments. In this study, we develop and test the hypothesis that audit quality and the management of earnings—both of which affects the information environment of the firm—influence the degree of price clustering. Results show that firms with Big 4 auditors have less clustering in their stock prices while firms with higher abnormal audit fees, more discretionary accruals, and firms that tend to manipulate earnings have a higher degree of price clustering. These findings support our hypothesis and suggest that accounting information quality helps explain the price clustering anomaly and subsequently influences the efficiency of financial markets.

Suggested Citation

  • Baig , Ahmed & Blau , Ben & Hao, Jie, 2020. "Accounting Information Quality and the Clustering of Stock Prices," American Business Review, Pompea College of Business, University of New Haven, vol. 23(2), pages 182-210, November.
    • Handle: RePEc:ris:ambsrv:0010
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    References listed on IDEAS

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    More about this item

    Keywords

    Price Clustering; Round Prices; Big 4; Earnings Manipulation;
    All these keywords.

    JEL classification:

    • B20 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - General

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