Idiosyncratic Return Volatility and Price Informativeness: Evidence from Stock Splits

57 Pages Posted: 14 Mar 2012 Last revised: 7 May 2013

See all articles by Mark H. Liu

Mark H. Liu

University of Kentucky - Gatton College of Business and Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 20, 2012

Abstract

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.

Keywords: idiosyncratic return volatility, return synchronicity, price informativeness, institutional investors, stock splits

JEL Classification: G11, G14, G24

Suggested Citation

Liu, Mark H., Idiosyncratic Return Volatility and Price Informativeness: Evidence from Stock Splits (August 20, 2012). Available at SSRN: https://ssrn.com/abstract=2021320 or http://dx.doi.org/10.2139/ssrn.2021320

Mark H. Liu (Contact Author)

University of Kentucky - Gatton College of Business and Economics ( email )

550 South Limestone
Lexington, KY 40506
United States
859-257-9842 (Phone)
859-257-9688 (Fax)

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