No abstract

This article studies differences in the information content of 870,000 news announcements in 56 markets around the world. In most developed markets, a firm's stock price moves much more on days with public news about the firm. In contrast, in many emerging markets volatility is similar on news and non-news days. We examine several hypotheses for our findings. Crosscountry differences in stock price reactions are best explained by insider trading, followed by differences in the quality of the news dissemination mechanism. Our findings are useful for quantifying the extent of insider trading and how the financial media affects international markets. (JEL G14, G15) Public news announcements are a major mechanism for disseminating information to investors. Each day the financial media releases thousands of articles covering companies in markets worldwide. Investors use this news to estimate assets' fundamental values. Despite the perceived importance of the The first two authors are from the McCombs School of Business at the University of Texas at Austin.

Reasoning that private firm-specific information causes firm-specific return variation that drives down market-model R 2 s, Morck, Yeung, and Yu (2000) begin a large body of research which interprets R 2 as an inverse measure of price informativeness. Low R 2 s or "synchronicity," as it is called in this literature, signal that prices more efficiently incorporate private firm-specific information, and high R 2 s indicate less. For this to be true, we would expect that low-R 2 stocks have characteristics that facilitate private informed trade, i.e. lower information costs and fewer impediments to arbitrage. However, in this paper we document the opposite: Low-R 2 stocks are small, young, and followed by few analysts, and have high bid-ask spreads, high price impact, greater short-sale constraints and are infrequently traded. In fact, microstructure measures suggest that private-information events are less likely for low-R 2 stocks than high, and that differences in R 2 are driven as much by firm-specific volatility on days without private news as by firm-specific volatility on days with private news. These results call into question prior research using R 2 to measure the information content of stock prices.

Reasoning that private firm-specific information causes firm-specific return variation that drives down market-model R 2 s, Morck, Yeung, and Yu (2000) begin a large body of research which interprets R 2 as an inverse measure of price informativeness. Low R 2 s or "synchronicity," as it is called in this literature, signal that prices more efficiently incorporate private firm-specific information, and high R 2 s indicate less. For this to be true, we would expect that low-R 2 stocks have characteristics that facilitate private informed trade, i.e. lower information costs and fewer impediments to arbitrage. However, in this paper we document the opposite: Low-R 2 stocks are small, young, and followed by few analysts, and have high bid-ask spreads, high price impact, greater short-sale constraints and are infrequently traded. In fact, microstructure measures suggest that private-information events are less likely for low-R 2 stocks than high, and that differences in R 2 are driven as much by firm-specific volatility on days without private news as by firm-specific volatility on days with private news. These results call into question prior research using R 2 to measure the information content of stock prices.

Reasoning that private firm-specific information causes firm-specific return variation that drives down market-model R2s, [Morck et al., 2000, The Information Content of Stock Markets: Why do Emerging Markets have Synchronous Stock Price Movements? Journal of Financial Economics, 58, 215–260] begin a large body of research which interprets R2 as an inverse measure of price informativeness. Low-R2s or "synchronicity," as it is called in this literature, signal that prices more efficiently incorporate private firm-specific information, and high R2s indicate less. For this to be true, we would expect that low-R2 stocks have characteristics that facilitate private informed trade, i.e., lower information costs and fewer impediments to arbitrage. However, in this paper we document the opposite: Low-R2 stocks are small, young, and followed by few analysts, and have high bid-ask spreads, high price impact, greater short-sale constraints and are infrequently traded. In fact, microstructure measures suggest that private-information events are less likely for low-R2 stocks than high, and that differences in R2 are driven as much by firm-specific volatility on days without private news as by firm-specific volatility on days with private news. These results call into question prior research using R2 to measure the information content of stock prices.