Financial Reporting Quality and Noise in Stock Returns: Evidence from Chinese A-B Twin Shares

Journal of Financial Reporting, Forthcoming https://doi.org/10.2308/JFR-2019-0019

57 Pages Posted: 15 Nov 2016 Last revised: 13 Aug 2020

See all articles by Liang Ma

Liang Ma

University of South Carolina - Darla Moore School of Business

Tao Ma

Texas Tech University

Henry L. Friedman

University of California, Los Angeles (UCLA) - Accounting Area

Date Written: July 12, 2020

Abstract

We examine how financial reporting quality affects the degree of noise in stock returns using the setting of Chinese A-B twin shares, which are shares for the same firm, traded on the same exchange but with separate inventor clienteles (i.e., mainly domestic vs. foreign). We measure return noise using the correlation between firm-specific returns of A-B twin shares and find that higher financial reporting quality leads to less return noise, both in panel regressions and using China’s 2007 accounting standard reform as an exogenous shock to financial reporting quality. We also find that returns are less noisy around earnings announcements than during other trading days. Our results suggest that higher-quality financial reporting can reduce the degree of noise in returns and make returns more efficient.

Keywords: Financial Reporting Quality, Noise in Stock Returns, Stock Market Efficiency, A-B Twin Shares, Chinese Stock Market

JEL Classification: G14, G15, M41

Suggested Citation

Ma, Liang and Ma, Tao and Friedman, Henry L., Financial Reporting Quality and Noise in Stock Returns: Evidence from Chinese A-B Twin Shares (July 12, 2020). Journal of Financial Reporting, Forthcoming https://doi.org/10.2308/JFR-2019-0019, Available at SSRN: https://ssrn.com/abstract=2869563 or http://dx.doi.org/10.2139/ssrn.2869563

Liang Ma

University of South Carolina - Darla Moore School of Business ( email )

1014 Greene Street
Columbia, SC 29208
United States
803-777-6366 (Phone)

HOME PAGE: http://sites.google.com/site/liangmaweb/

Tao Ma (Contact Author)

Texas Tech University ( email )

Box 42101
Lubbock, TX 79409-2101
United States

Henry L. Friedman

University of California, Los Angeles (UCLA) - Accounting Area ( email )

D406 Anderson Complex
Los Angeles, CA 90095-1481
United States

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