Accounting Quality, Stock Price Delay and Future Stock Returns

By Jeffrey L. Callen, Mozaffar Khan, Hai-fan Lu. 2013

240 citations recorded by the source corpus.

In frictionless capital markets with complete information and rational investors, stock prices adjust to new information instantaneously and completely. However, a substantial body of research studies information imperfections such as asymmetric information and incomplete information. Information imperfections potentially hinder timely price discovery and are likely associated with delayed stock price adjustment to information. Our first research question therefore is whether the quality of accounting information (or “accounting quality”) is one such information imperfection that is associated with cross-sectional variation in stock price delay. We define accounting quality as the precision with which financial reports convey information to equity investors about the firm’s expected cash flows. Poor accounting quality is likely associated with higher expected returns through uncertainty about stock valuation parameters and incomplete information. Our second research question therefore is whether the accounting quality component of price delay is associated with higher future stock returns. Consistent with our hypotheses, the results show that poor accounting quality is associated with delayed price adjustment and higher future stock returns. Thus, accounting quality plays a role in timely stock price discovery.

Subfields: Accounting, Finance

View Paper: https://www.semanticscholar.org/paper/5b72cd2bbf8fdb16de138357e7a10c4f10ecb1fc

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Citations in the corpus

Guiding Through the Fog: Financial Statement Complexity and Voluntary Disclosure (2016, unknown): “…and Thevenot, 2015), disagreement among credit rating agencies (e.g., Bonsall and Miller, 2013), reductions in the extent to which prices impound information (e.g., You and Zhang, 2009; Lee, 2012; Callen et al., 2013), and increased idiosyncratic volatility (e.g., Loughran and McDonald, 2014).”
Short interest and stock price crash risk (2015, background): “of Chen et al. (2001), the positive coefficients on firm size are consistent with their conjecture that small companies face less scrutiny from equity analysts and have more scope for hiding bad news from the public. This in turn allows bad news to dribble out slowly and imparts a more positive skew”
The Effect of Annual Report Readability on Analyst Following and the Properties of Their Earnings Forecasts (2011, unknown): “" Stimulated by Chomsky's (1965) seminal generative grammar, there has been a great deal of theoretical and empirical work on what constitutes syntactic complexity and how it functions as a determinant of both sentence comprehension (Gibson 1998) and production (Thompson and Faroqi-Shah 2002). Accor”
R2 and Idiosyncratic Risk are not Interchangeable (2014, methodology): “…of informed trading (Easley, Hvidkjaer, and O’Hara 2002); SPREAD, bid-ask spread; DELAY, the price delay measure (Hou and Moskowitz 2005; Callen, Khan, and Lu 2013); ILLIQ, illiquidity measure (Amihud 2002); LIQVOL, volatility of the Amihud (2002) liquidity measure, as used in Lang and…”