Idiosyncratic return variation: firm-specific information or noise?
11 Pages Posted: 8 Jul 2021
Date Written: June 13, 2021
There has been a long debate on the interpretation of idiosyncratic return variation. We inform this debate by examining the extent to which stock return synchronicity is associated with the post-earnings announcement drift (PEAD) in China. We find that firms with higher synchronicity exhibit less pronounced PEAD and that this negative association weakens for firms with high institutional ownership. Findings suggest that in the Chinese stock markets, where retail investors are in the majority, idiosyncratic returns reflect noise rather than firm-specific information on average, and institutional investors play a role in reducing noise in the idiosyncratic returns.
Keywords: Stock return synchronicity, Price informativeness, Post-Earnings Announcement Drift, Institutional ownership
JEL Classification: G14
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