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

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