Financial Reporting Quality and Noise in Stock Returns: Evidence from Chinese A-B Twin Shares
54 Pages Posted: 15 Nov 2016 Last revised: 16 Dec 2018
Date Written: December 14, 2018
We examine how financial reporting quality affects the degree of noise in stock returns using the setting of Chinese A-B twin shares. 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. Furthermore, 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
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