Idiosyncratic Return Volatility and Price Informativeness: Evidence from Stock Splits
Mark H. Liu
University of Kentucky - Gatton College of Business and Economics
March 12, 2012
Whether higher idiosyncratic return volatility means more or less informative stock prices is an ongoing debate. All the existing literature relies on cross-sectional evidence, which makes it hard to isolate the effects of price informativeness on idiosyncratic volatility from other effects. I circumvent this problem by investigating how price informativeness and idiosyncratic volatility change for the same firm around stock splits. I find a strong negative relation between the change in idiosyncratic volatility and the change in the stock ownership by the more sophisticated institutional investors (especially short-term investors, independent investors, and transient investors, who are the most sophisticated among institutional investors). There is also a negative relation between the change in idiosyncratic volatility and the change in five other commonly used price informativeness measures. Overall, I find that an increase in price informativeness is associated with a decrease in idiosyncratic volatility.
Number of Pages in PDF File: 56
Keywords: idiosyncratic return volatility, return synchronicity, price informativeness, institutional investors, stock splits
JEL Classification: G11, G14, G24working papers series
Date posted: January 15, 2012 ; Last revised: March 14, 2012
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