Illiquidity and the Measurement of Stock Price Synchronicity

Gassen, Joachim; Skaife, Hollis Ashbaugh; Veenman, David

doi:10.1111/1911-3846.12519

Cited by 46 publications

(19 citation statements)

References 122 publications

(340 reference statements)

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“…In our cross-sectional analysis we also account for the impact of liquidity using the proportion of non-zero returns. Our average level of liquidity for Kenya, Nigeria and South Africa, are fairly consistent with the average values of the African sub-sample reported inGassen et al (2020). But we observe higher levels of illiquidity in Botswana and Ghana.…”

supporting

confidence: 89%

“…On the other hand, Roll (1988) observes a positive relationship between firm size and R 2 arguing that larger firms may be less susceptible to systematic risks that do not arise from the market as a whole. In a more recent study, Gassen et al (2020) show that the a larger firm size leads to a higher level of stock market synchronicity in a large study involving fifty countries. Correspondingly, one may expect a significant and positive relationship between firm size and synchronicity.…”

Section: Determinants Of Synchronicity: Do Firm Size and Age Matter?mentioning

confidence: 92%

“…Gassen et al (2020) argue that using an R 2 based measure of synchronicity may be problematic for illiquid markets. One of their main measures of liquidity is the proportion of zero returns.…”

mentioning

confidence: 99%

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Stock return synchronicity in a weak information environment: evidence from African markets

Kyiu

Jones

2022

IJMF

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PurposeThis study investigates the level of stock return synchronicity in African markets with the aim of establishing whether, contrary to conventional wisdom, stock return synchronicity can be low in countries with relatively weak information environments.Design/methodology/approachThe authors use a sample of five African countries (Botswana, Ghana, Kenya, Nigeria and South Africa) and a total of 616 firms over the period 2005–2015. This study's main measure of synchronicity is the R2 from a regression of stock returns on index returns. The authors also carry out regression analysis to investigate the main firm-level drivers of synchronicity.FindingsOn average, firms in African markets do not exhibit high levels of stock return synchronicity, providing support for the view that stock return synchronicity can be low in markets with relatively weak transparency. The authors, however, observe an increase in the level of synchronicity during the global financial crisis, notably for Ghana and Kenya. In the regression analysis, the main firm-level driver of synchronicity is firm size, while contrary to some previous studies, ownership structure has no impact. The authors also find evidence of the impact of changes in accounting regulation, notably the mandatory adoption of IFRS, on the level stock synchronicity.Originality/valueThis study contributes to the understanding of stock return synchronicity and how price discovery can vary between different information environments. The authors argue that stock returns in African countries may not always fit the stereotypical view that they are synchronous. The level of synchronicity among firms suggests that corporate events may carry some stock price implications.

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supporting

confidence: 89%

Section: Determinants Of Synchronicity: Do Firm Size and Age Matter?mentioning

confidence: 92%

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Stock return synchronicity in a weak information environment: evidence from African markets

Kyiu

Jones

2022

IJMF

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“…To preclude the possibility that lower synchronicity reflects cash flow uncertainty due to the greater frequency of news arrival in the stock market, we include Zero‐Return Percentage in our model. Gassen, Skaife, and Veenman () argue that the zero return metric effectively measures firm‐specific information impounded into stock prices. We measure Zero‐Return Percentage as the proportion of zero‐return days for the issuer's stock over the 225 days prior to the offering date or transaction date.…”

Section: Methodsmentioning

confidence: 99%

“…Hou, Peng, and Xiong () provide evidence that investor sentiment is a key driver of low R 2 . In addition, Gassen, Skaife, and Veenman () confirm that illiquidity is the first order determinant of R 2 .…”

mentioning

confidence: 93%

Are Low Equity R² Firms More or Less Transparent? Evidence from the Corporate Bond Market

Hao¹,

Prevost²,

Wongchoti

2018

Financial Management

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We examine the relation between a firm's equity R2 and the pricing and design of its debt securities. We find that firms with less synchronous stock returns are associated with a higher cost of debt after controlling for default and liquidity risks. Bonds issued by low synchronicity issuers also experience larger price reactions to information signals provided by equity analysts. Further analysis demonstrates that lower synchronicity is associated with cross‐sectional variation in the use of call provisions and with split S&P and Moody's bond ratings. Contrary to conventional interpretation, these results suggest that low R2 reflects inferior information transparency and higher information risk.

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Conservatism and stock price informativeness

2023

J Corp Accounting Finance

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This paper examines how conservative financial reporting influences stock price informativeness, which is defined as the extent to which the current market price reflects future earnings information. Using the accuracy of the future earnings expectations embedded in the current equity price as a measure of stock price informativeness, I find that conservative reporting is positively associated with price informativeness. The results are robust to an alternative stock price informativeness measure, namely, specific return variation or price non-synchronicity. Furthermore, I also find that a greater positive association between conservatism and stock price informativeness is associated with (1) lower analyst coverage and decreased forecast dispersion, (2) greater bid-ask spreads and greater R&D, and (3) lower financial disclosure quality, supporting the argument that main channel by which conservatism improves stock price informativeness is its impact on the information environment. Overall, the evidence suggests that (1) conservatism improves stock price informativeness by improving the firm's information environment, and (2) the marginal benefit of improvement in stock price informativeness via conservatism is more pronounced in firms with poorer information environments. The results further confirm that conservatism substitutes for information environments in ensuring more accurate equity pricing.

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Illiquidity and the Measurement of Stock Price Synchronicity

Cited by 46 publications

References 122 publications

Stock return synchronicity in a weak information environment: evidence from African markets

Stock return synchronicity in a weak information environment: evidence from African markets

Are Low Equity R² Firms More or Less Transparent? Evidence from the Corporate Bond Market

Conservatism and stock price informativeness

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Illiquidity and the Measurement of Stock Price Synchronicity

Cited by 46 publications

References 122 publications

Stock return synchronicity in a weak information environment: evidence from African markets

Stock return synchronicity in a weak information environment: evidence from African markets

Are Low Equity R2 Firms More or Less Transparent? Evidence from the Corporate Bond Market

Conservatism and stock price informativeness

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Product

Resources

About

Are Low Equity R² Firms More or Less Transparent? Evidence from the Corporate Bond Market