The Effects Of Comparability On Stock Price Synchronicity

Under the background of international accounting standards convergence, improving the comparability and transparency of accounting information has become a major objective of International Financial Reporting Standards. Our new Corporate Accounting Standards which are implemented from 2007 are to achieve the essence of IFRS convergence. How the new accounting standards will affect information conveying and its impact on the efficiency of the capital market is worth of much attention. An individual firm’s stock price reflects market-level, industry-level, and firm-specific information. Stock price synchronicity can be defined as the extent to which market and industry returns explain variation in firm-level stock returns. So this paper uses stock price synchronicity as a benchmark to evaluate the relative amounts of market-level, industry-level, and firm-specific information incorporated into prices. Based on the Information efficiency theory of stock price synchronicity, this paper explores whether the new accounting standards implemented in our country in 2007 have changed the information environment. If they have promoted informed trading as they are high-quality accounting standards. The paper proposes that the extent of firm-specific information incorporated into prices has been changed with the enforcement of the new accounting standards, thus affecting the stock price synchronicity. So it can be said this issue is of great significance for practitioners and theoretical research. This paper selects Comparability as a representative of the accounting information quality. Based on transactions with private information theory, this paper argues that comparability is greater because of accounting standards reform, which could reduce information asymmetry between insiders and outsiders of a company. Under the circumstances of certain marginal revenue, marginal cost of collecting information will be reduced, which makes informational transactions become more active. So stock prices will reflect much more characteristics of a company’s fundamentals, which leads to reduced stock price synchronicity. Influenced by stock prices, the signaling mechanism is strengthened to achieve the optimal allocation of resources. In addition to the direct path of the influence of comparability on stock price synchronicity, the paper also explores the indirect path from the aspects of institutional investors, analysts and ownership concentration.Firstly, this paper defines the concepts of comparability and stock price synchronicity. Besides combining the literature, the paper proposes hypotheses and put forward empirical models based on theoretical analysis. In this paper, the sample period covers the 9-year period,2005-2013. I extract stock return and accounting data from the CSMAR and WIND database. In addition, this paper limits the sample to non-financial firms. As they are unbalanced panel data, in order to select between mixed OLS regression, random effects model and fixed effects model, this paper enforces the fixed effects model F test and Hausman test. Moreover, robustness tests are operated to examine the hypotheses further. Finally, this paper analyzes the empirical results and draw corresponding conclusions. Besides, the paper points out its limitations and makes recommendations to further research.Empirical results show that stock price synchronicity is inversely related to comparability, consistent with hypotheses 1. Institutional investors and ownership concentration play roles to strengthen the process, while analysts play a role to weaken the effects. These findings suggest institutional investors’holding and transacting stocks lead to a lower stock price synchronicity. The results indicate that analysts increase the amount of industry-level information in prices through intra-industry information transfers. After grouping the variable of ownership concentration, this paper finds as concentration increases, synchronicity increases at a decreasing rate up to its maximum threshold, after which it begins to decrease.This paper may contribute to the extant literature in some ways. I provide a unique focus on firm-level comparability within an important emerging market-China. The paper helps to better understand the effects of comparability mechanisms on stock price synchronicity, including the direct and indirect ways. Besides, the sample spans from 2005 to 2013, which is of data timeliness.