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Information Uncertainty and Expected Returns

Author

Listed:
  • Guohua Jiang

    (Peking University)

  • Charles M. C. Lee

    (Cornell University)

  • Yi Zhang

    (Barclays Global Investors)

Abstract

This study examines the role of information uncertainty (IU) in predicting cross-sectional stock returns. We define IU in terms of “value ambiguity,” or the precision with which firm value can be estimated by knowledgeable investors at reasonable cost. Using several different proxies for IU, we show that (1) on average, high-IU firms earn lower future returns (the “mean” effect), and (2) price and earnings momentum effects are much stronger among high-IU firms (the “interaction” effect). These findings are consistent with analytical models in which high IU exacerbates investor overconfidence and limits rational arbitrage.

Suggested Citation

  • Guohua Jiang & Charles M. C. Lee & Yi Zhang, 2005. "Information Uncertainty and Expected Returns," Review of Accounting Studies, Springer, vol. 10(2), pages 185-221, September.
    • Handle: RePEc:spr:reaccs:v:10:y:2005:i:2:d:10.1007_s11142-005-1528-2
    DOI: 10.1007/s11142-005-1528-2
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    References listed on IDEAS

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    1. Francis, Jennifer & LaFond, Ryan & Olsson, Per & Schipper, Katherine, 2003. "Accounting Anomalies and Information Uncertainty," SIFR Research Report Series 13, Institute for Financial Research.
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    Citations

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    Cited by:

    1. John L. Campbell & Hsinchun Chen & Dan S. Dhaliwal & Hsin-min Lu & Logan B. Steele, 2014. "The information content of mandatory risk factor disclosures in corporate filings," Review of Accounting Studies, Springer, vol. 19(1), pages 396-455, March.
    2. Michael S. Drake & James N. Myers & Linda A. Myers & Michael D. Stuart, 2015. "Short sellers and the informativeness of stock prices with respect to future earnings," Review of Accounting Studies, Springer, vol. 20(2), pages 747-774, June.
    3. Dain C. Donelson & Robert J. Resutek, 2015. "The predictive qualities of earnings volatility and earnings uncertainty," Review of Accounting Studies, Springer, vol. 20(1), pages 470-500, March.
    4. Maureen F. McNichols & Stephen R. Stubben, 2015. "The effect of target-firm accounting quality on valuation in acquisitions," Review of Accounting Studies, Springer, vol. 20(1), pages 110-140, March.
    5. Marlene Plumlee & Yuan Xie & Meng Yan & Jeff Jiewei Yu, 2015. "Bank loan spread and private information: pending approval patents," Review of Accounting Studies, Springer, vol. 20(2), pages 593-638, June.
    6. Haifeng You & Xiao-jun Zhang, 2009. "Financial reporting complexity and investor underreaction to 10-K information," Review of Accounting Studies, Springer, vol. 14(4), pages 559-586, December.
    7. Stephen Brown & Stephen A. Hillegeist, 2007. "How disclosure quality affects the level of information asymmetry," Review of Accounting Studies, Springer, vol. 12(2), pages 443-477, September.

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    More about this item

    Keywords

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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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