Earnings Quality and Price Synchronicity: Industry-Wide and Firm-Specific Information

63 Pages Posted: 20 Jun 2013

See all articles by C.S. Agnes Cheng

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance

Joe Johnston

Illinois State University - Department of Accounting

Ling Zhou

University of New Mexico

Date Written: February 2012

Abstract

We investigate the association between earnings quality and price synchronicity. Price synchronicity captures the extent to which a firm’s returns are explained by market and industry returns, implying that low price synchronicity could be a result of less industry-wide information impounded into prices. However, an increasing number of recent studies use low price synchronicity as an indication of more firm-specific information being impounded in stock prices. Due to the converse effects of industry-wide and firm-specific information on price synchronicity, the relation between earnings quality and price synchronicity should depend on whether industry-wide or firm-specific information dominates the variation of price. Findings in previous studies imply that high analyst coverage leads to a domination of industry-wide information. Accordingly, we find price synchronicity increases with earnings quality for firms with high analyst coverage; consistent with higher earnings quality leads to more industry-wide information. For firms with no or low analyst coverage, we find price synchronicity decreases with earnings quality; consistent with higher earnings quality leads to more firm-specific information. Our findings are robust with multiple measures of earnings quality, using future ERC approach and controlling for endogeneity.

Keywords: earnings quality, price synchronicity, financial analysts

Suggested Citation

Cheng, C.S. Agnes and Johnston, Joseph Atkins and Zhou, Ling, Earnings Quality and Price Synchronicity: Industry-Wide and Firm-Specific Information (February 2012). Available at SSRN: https://ssrn.com/abstract=2280899 or http://dx.doi.org/10.2139/ssrn.2280899

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Joseph Atkins Johnston (Contact Author)

Illinois State University - Department of Accounting ( email )

United States
309-438-3830 (Phone)

Ling Zhou

University of New Mexico ( email )

107 Humanitites Building
Albuquerque, NM 87131-1221
United States
(505)277-0335 (Phone)

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