Financial Reporting Quality and Noise in Stock Returns: Evidence from Chinese A-B Twin Shares
51 Pages Posted: 15 Nov 2016 Last revised: 13 Dec 2017
Date Written: December 10, 2017
We examine the relation between financial reporting quality and the degree of noise in stock returns, using the setting of A-B twin shares traded in China. A- and B-shares have equivalent dividend and cash flow rights and are traded on the same exchanges, but are available to different sets of investors. We use a simple model to show that more return noise should manifest in less-correlated A-B twin share returns. Thus, the A-B twin share setting allows us to capture variation in the degree of return noise without having to infer noise from a potentially misspecified valuation model. Using standard earnings quality proxies, we find that higher earnings quality is associated with less noise in returns, and 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, potentially making prices more informative and returns more efficient.
Keywords: Financial Reporting Quality, Noise in Stock Returns, Stock Market Efficiency, A-B Twin Shares, Chinese Stock Market
JEL Classification: M41, G14, G15
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