Financial Reporting Quality and Noise Trading: Evidence from Chinese A-B Twin Shares

• In Event: Disclosure and Capital Markets

Abstract

We examine whether earnings quality can reduce noise trading by examining price movements of A-B twin shares traded in the Chinese stock markets. In the absence of noise trading, A- and B-share prices should move in synchronicity in response to innovations in fundamentals. However, the existence of noise trading will cause A-B share prices move in opposite directions, resulting in A-B share non-synchronicity. We find that firms with high earnings quality are associated with low price non-synchronicity and this negative association is significantly weakened after an exogenous decrease in earning quality arising from the adoption of new accounting standards in 2007. Lastly, we also find that price non-synchronicity is significantly lowered on earnings announcement dates and our results cannot be explained by non-synchronous trading of A-B shares. By employing the unique twin-share setting, this paper circumvents some empirical design weakness in prior studies and provides unambiguous evidence that earnings quality can reduce noise trading and improve share price informativeness.

Author

• Tao Ma, University of South Carolina