Earnings Quality And Price Synchronicity - Industry And Firm-Specific Information

This study examines how earnings quality affects price synchronicity through its potential impact on the incorporation of industry and firm-specific information into stock prices. Price synchronicity captures the extent to which a firm's returns are explained by market and industry returns. Prior literature widely uses high price synchronicity as an indication of lack of firm-specific information being reflected in stock prices. We expect that the quality of earnings can improve the incorporation of both industry and firm-specific information and aim to separate the two effects on price synchronicity. We find a significantly negative relation between earnings quality and price synchronicity for firms with no or low analyst following, indicating that high earnings quality facilitates the incorporation of more firm-specific information into prices for those firms. In contrast, the relation between earnings quality and price synchronicity becomes significantly positive for firms followed by more analysts, consistent with earnings quality helping stock prices incorporate more industry information when there is sufficient analyst coverage. These results are robust to multiple measures of earnings quality and with control for various risk measures. Price synchronicity is an important measure of price informativeness and is flexible in investigating effects of various types and aspects of information. Our study contributes to the literature by demonstrating ways to evaluate relation between quality of accounting information and price informativeness.