A Study Of Stock Return Idiosyncratic Volatility: In Perspective Of Firm-specific Information

The key point of efficient market theory is stock price is a reflection of information, and whether stock return volatility is caused by information shock is a way to verify efficient market theory(Ross,1989). Roll(1988) find that the information of market and industry can only explain small part of individual stock return variation, he think the left part is caused by firm’ s information or noise. After that, huge literatures find that non-synchronicity of stock return is a reflection of firm’s information. We start this study by contacting idiosyncratic volatility and non-synchronicity of stock return by carding literatures and model deduced which set up by Jin and Myers(2006), and on this entry point to study stock return idiosyncratic volatility through the perspective of firm-specific information.The conclusions of my dissertation are as followed. Firstly, we find that stock return idiosyncratic volatility is inversely associated with firm information transparency and positively associated with insider trading. Insider trading improving the sensitiveness of the relationship between firm information transparency and stock return idiosyncratic volatility. Furthermore, insider trading can profit more when stock return idiosyncratic is higher. Together these results suggest that nonpublic disclosure firm-specific information is an important source of informed trading and is through insider trading absorbed into stock price.Secondly, we found a negative relation between manager compensation and stock price information contents in China A-share market. We found this paradox is attributed to the loss of shareholder’s bargaining power in (manager compensation, information disclosure quality) game with manager theoretically. Further empirically evidence support this inference, negative relation can be significantly decreased by unambiguous property right, increasing share holdings of managers and improvement of corporate governance. In addition, we found non-pecuniary compensation is also negatively related to stock price information contents in stated-owned enterprise. Our results suggest that it must be perfected corporate governance structure firstly that listed companies in China can improve information disclosure quality through paying more compensation to manager.Thirdly, we find that margin trading lower firm-specific stock return volatility through reducing noise trading of underlying securities, improving rate of firm information into stock price and lowering earnings management of underlying firm. Our study implies that margin trading does improve information efficiency of stock prices. Further, we also find the effects of margin trading on underlying firm’s earnings management only exist during the beginning of margin trading but not persistently, which implies it needs to improve outside governance to enterprise by margin trading.And fourthly, we find that idiosyncratic volatility puzzle does exist in A-share markets, while the expected idiosyncratic volatility estimated by EGARCH model is not significantly related with expected return. And when we control information asymmetric among investors, idiosyncratic puzzle is disappear or mitigated. Furthermore, we find idiosyncratic is significantly positive related with corresponding time period stock return.The contributions or innovations of my dissertation are as followed. Firstly, we relate idiosyncratic volatility and stock return non-synchronicity, which provide a new perspective for idiosyncratic volatility. Secondly, my dissertation explains why the conclusions of literature related to firm information environment and information contents of stock return are inconsistent. And we provide empirical evidence of source of informed traders’ private information and the channel it went through into stock price, which provide information explanation for opaque firm information environment and high stock return synchronicity. Thirdly, we provide empirical evidence of management compensation and information contents of stock return, which provide a new mechanism of corporate governance on stock price. Fourthly, we provide empirical evidence of margin trading and stock return information contents and their mechanism, to our knowledge, it is the first literature in this fields. And finally, we find information asymmetric among investors can explain idiosyncratic volatility puzzle, which provide new explanation for this hot topic.Overall, this dissertation provides an information perspective of idiosyncratic volatility. The results indicate that idiosyncratic volatility is a "good" volatility. It represent more firm-specific information went into stock price and more outside governance and supervise from investor in the market. Bartram et al. (2012) also define idiosyncratic volatility is a "good" volatility, while they consider it represents more risk investment by the firm’s firm, which is different from us.