Accounting Quality, Stock Price Delay and Future Stock Returns

Posted: 25 Nov 2011 Last revised: 13 Jan 2016

See all articles by Jeffrey L. Callen

Jeffrey L. Callen

University of Toronto - Rotman School of Management

Mozaffar Khan

Causeway Capital Management, LLC

Hai Lu

University of Toronto - Rotman School of Management

Multiple version iconThere are 2 versions of this paper

Date Written: November 19, 2011

Abstract

In frictionless capital markets with complete information and rational investors, stock prices adjust to new information instantaneously and completely. However, a substantial body of research studies information imperfections such as asymmetric information and incomplete information. Information imperfections potentially hinder timely price discovery and are likely associated with delayed stock price adjustment to information. Our first research question therefore is whether the quality of accounting information (or “accounting quality”) is one such information imperfection that is associated with cross-sectional variation in stock price delay. We define accounting quality as the precision with which financial reports convey information to equity investors about the firm’s expected cash flows. Poor accounting quality is likely associated with higher expected returns through uncertainty about stock valuation parameters and incomplete information. Our second research question therefore is whether the accounting quality component of price delay is associated with higher future stock returns. Consistent with our hypotheses, the results show that poor accounting quality is associated with delayed price adjustment and higher future stock returns. Thus, accounting quality plays a role in timely stock price discovery.

Keywords: Accounting Quality, Stock Price Delay, Stock Returns, Asset Pricing

JEL Classification: M41, G12, G14

Suggested Citation

Callen, Jeffrey L. and Khan, Mozaffar and Lu, Hai, Accounting Quality, Stock Price Delay and Future Stock Returns (November 19, 2011). Contemporary Accounting Research, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1961962

Jeffrey L. Callen

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada
416-946-5641 (Phone)
416-971-3048 (Fax)

Mozaffar Khan (Contact Author)

Causeway Capital Management, LLC

Hai Lu

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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