Bank ownership and stock price informativeness. Does politics matter?

This study investigates the effects of ownership on the informativeness of the stock prices of 636 commercial banks from 59 countries for 2002–2014. We find strong and robust evidence that state ownership is associated with stock prices having less information in developing countries. This result is consistent with the conjecture that state ownership is associated with a less transparent environment that discourages investors from trading on private information. Furthermore, we find that politics magnifies the effect of state ownership on the informativeness of stock prices during election years. In particular, we show that stock prices are less informative for state ownership in countries with civil law or parliamentary systems. These findings shows that the political channel plays an important role in determining the expropriation by government shareholders, especially in developing countries.     

The influence of ownership structure,analyst following and institutional infrastructure on stock price informativeness: international evidence

Using firms from 20 non‐US countries, we investigate whether and how ownership structure, analyst following and country‐level institutions influence stock price informativeness (SPI). We find that stock price informativeness decreases with control‐ownership wedge (the detachment of voting rights from cash flows rights), and this SPI‐reducing effect of the wedge is attenuated for firms with high analyst following and in countries with strong country‐level institutions. We also find that stock price informativeness decreases with analyst following, but this SPI‐reducing effect of analyst following is attenuated in countries with strong country‐level institutions.     

Business strategy,stock price informativeness,and analyst coverage efficiency

We examine how business strategy affects stock price informativeness which in turn influences analyst coverage efficiency. Using stock price synchronicity and the probability of informed trading as proxies for stock price informativeness, we show that stock prices of prospectors are less informative than those of defenders. Next, we explore two channels through which business strategy influences analyst coverage efficiency. We first test and find support for an information transfer channel, i.e., the higher stock price synchronicity of prospectors facilitates more information transfer by analysts, resulting in higher analyst coverage efficiency of prospectors than defenders. Next, we test and find support for an informed trading channel, i.e., the higher probability of informed trading on stocks of defenders intensifies competition between informed traders and analysts. Such competition adversely affects analyst coverage efficiency, leading to lower analyst coverage efficiency of defenders than prospectors. Our findings are robust to an array of robustness checks including 2SLS/IV tests, differences‐in‐difference tests, and high‐tech industry sensitivity analyses.     

Press freedom,externally-generated transparency,and stock price informativeness: International evidence

This paper examines the impact of press freedom on stock price informativeness in a sample of firms from 50 countries. We find a significant relation between more press freedom and lower stock price synchronicity. Our results suggest that the freedom of the press can enhance the information environment of stock markets.     

Passive Institutional Ownership,R2 Trends,and Price Informativeness

A distinctive trend in the capital markets over the past two decades is the rise in equity ownership of passive financial institutions. We propose that this rise has a negative effect on price informativeness. By not trading around firm‐specific news, passive investors reduce the firm‐specific component of total volatility and increase stock correlations. Consistent with this hypothesis, we find that the growth in passive institutional ownership is robustly associated with the growth in market model R²s of individual stocks since the early 1990s. Additionally, we find a negative relation between passive ownership and earnings predictability, an informativeness proxy.     

Price informativeness and state-owned enterprises: Considering their heterogeneity

State owned enterprises (SOEs) play a pivotal role in the world economy. However, how state ownership affects price informativeness is less-explored, much less the impacts of differing forms of state ownership. We find that the price synchronicity of SOEs is about 9.0% to 15.4% larger than that of non-SOEs, indicating that SOEs have less informative stock prices. Institutional environment and government regulations such as anti-corruption campaigns are important mediating factors in reducing price synchronicity, but the price synchronicity of SOEs is still significantly larger than that of non-SOEs. Differences in state ownership matters for price synchronicity. SOEs associated with local governments (SOELGs), as well as those represented by state assets management bureaus (SAMBs), have larger price synchronicity than non-SOEs. Although SOEs controlled by central governments (SOECGs) also have larger price synchronicity than non-SOEs based on univariate tests, this difference becomes statistically insignificant when controlling for other factors. SOEs are less likely to be publicly exposed for fraud, implying that state ownership provides a buffer for SOEs. Overall, we evidence that state ownership has an important role in deprecating stock-price informativeness, with the impact differing depending on whether SOEs are controlled by central or non-central governments.     

The Political Determinants of the Cost of Equity: Evidence from Newly Privatized Firms

In this paper, we investigate the political determinants of the cost of equity using a unique data set of 236 firms privatized between 1987 and 2006 in 38 countries. We find robust evidence that the cost of equity is increasing in government ownership. We also show that the cost of equity is significantly related to political orientation and the extent of government expropriation. Furthermore, we report a less pronounced effect of state ownership on the cost of equity in more populist governments and in more financially developed countries, in addition to a more pronounced effect of state ownership on the cost of equity when the risk of government expropriation is higher. Results from an event study examining the replacement of left‐wing governments by right‐wing governments suggest a lower cost of equity in more financially developed countries and a higher cost of equity in more autocratic countries and in countries with a high risk of government expropriation. Finally, we find that chief executive turnover is associated with a higher cost of equity in more autocratic countries.     

Cross-country differences in the effect of political connections on stock price informativeness

Using an international sample of firms from 28 countries, we document that there exists a negative relationship between political connections and the informativeness of stock price, as measured by idiosyncratic volatility (IV). This finding is robust to alternative regression specifications, sub-samples analyses, and concerns related to endogeneity. A more detailed analysis shows that out of the different types of possible connections, the connectedness of the owners is the primary driver of this result. Further, the negative association is only significant for firms in countries characterized by low institutional quality (corrupted countries, countries with low access to external equity markets, and countries with low media penetration). There is no evidence of any relation between political connections and stock price informativeness for firms in countries characterized by high institutional quality. Overall, our results show that although political connections exacerbate rent-seeking that weaken the firms’ information environment on average, the negative information consequences are compensated by the countries’ institutional quality.     

Fund ownership and stock price informativeness of Chinese listed firms

We examine the impact of mutual fund ownership on stock price informativeness in China. Existing evidence shows that stock price informativeness is low in China, and attributes this to firms’ lack of disclosure incentives under the weak investor protection institutional environment. Mutual funds are more sophisticated and influential than individual investors to monitor firms, and thus serve as an external governance mechanism to improve corporate transparency. However, the impact of mutual funds in China can also be moderated by state ownership of listed firms, which reduces firms’ dependence on outside investors for capital. Indeed, we find that mutual fund ownership is positively related to share price informativeness, but this effect is less pronounced among state-controlled firms. The main policy implication from our findings is that mutual funds contribute to the corporate information environment of emerging economies but further privatization of listed firms would be needed to realize greater benefit.     

The impact of state ownership on share price informativeness: The case of the Split Share Structure Reform in China

This study examines the impact of state ownership on share price informativeness using the unique setting of the Split Share Structure Reform in China. This reform abolishes the trading restriction on shares held mainly by state shareholders. In doing so, it renders state shareholders' wealth more sensitive to share price movements and decreases their conflict of interests with private shareholders. This change is expected to strengthen the corporate governance incentives of state shareholders and reduce the information asymmetry in Chinese listed firms. This prediction is confirmed through empirical evidence of increased share price informativeness among firms that are more sensitive to the impact of this reform, i.e. those with more state ownership or restricted shares. These findings imply that this reform benefits the information environment and minority shareholders in the Chinese stock market.     

Corporate Disclosure Policy and the Informativeness of Stock Prices

We examine the association between voluntary corporate disclosure and the informativeness of stock prices. We measure corporate disclosure using the AIMR-FAF annual corporate disclosure ratings. We define price informativeness by the association between current stock returns and future earnings changes: more informative stock price changes contain more information about future earnings changes. To measure this association, we regress current returns against (current and) future earnings changes. The aggregated coefficient on the future earnings changes, which we refer to as the future ERC, is our measure of informativeness (association).We hypothesize and find that greater disclosure is associated with stock prices that are more informative about future earnings (i.e., higher future ERC). These results provide empirical support for the widely held, but heretofore empirically undocumented, belief that greater disclosure provides information benefits to investors.     

The effects of trading rights and ownership structures on the informativeness of accounting earnings: Evidence from China’ split share structure reform

This paper examines how the removal of trading restrictions and ownership structures affect earnings informativeness by investigating the changes in the earnings-return relation around China’s split share structure reform. I find the reform has a negative impact on the relationship between controlling shareholders’ ownership and earnings informativeness, which is consistent with the idea that the removal of trading restrictions gives controlling shareholders incentives to influence the stock price through managing earnings. I also find that earnings informativeness decreases with the reduction in controlling shareholders’ ownership. This dilution effect is more significant for firms with non-state controlling shareholders or with controlling shareholders that are not monitored by other large shareholders. The results are consistent with the notion that controlling shareholders provide less informative earnings in response to the dilution of their ownership to avoid the constraints arising from the increased monitoring by outside investors.     

Family control and idiosyncratic volatility: Evidence from listed firms in Hong Kong

Family control of listed firms in Hong Kong is substantively different and materially higher than in the US which could offer different insights into the effects of family ownership on corporate transparency. Using a sample of listed Hong Kong firms and idiosyncratic volatility as a proxy for firm-specific stock price informativeness, we find that family firms exhibit higher idiosyncratic volatility of stock prices than similar non-family firms. Further, the relation between family ownership and idiosyncratic volatility is weaker for firms with higher leverage but stronger in periods before equity issues. Additionally, we find that family firms disclose more information, particularly related to operations, than nonfamily firms in annual reports. These results are consistent with the argument that family firms disclose more information than their nonfamily peers to reassure skeptical outside investors that they are not expropriating their investment.     

Divergence of Cash Flow and Voting Rights,Opacity, and Stock Price Crash Risk: International Evidence

This study investigates whether and how the deviation of cash flow rights (ownership) from voting rights (control), or simply the ownership‐control wedge, influences the likelihood that extreme negative outliers occur in stock return distributions, which we refer to as stock price crash risk. We do so using a comprehensive panel data set of firms with a dual‐class share structure from 20 countries around the world for the period of 1995–2007. We predict and find that opaque firms with a large wedge are more crash prone than opaque firms with a small wedge. In addition, we predict and find that the positive relation between the wedge and crash risk is less pronounced for firms with more effective external monitoring and for firms with greater growth opportunities. The results of this study are broadly consistent with Jin and Myers’s theory that agency costs, combined with opacity, exacerbate stock price crash risk.     

Does board gender diversity improve the informativeness of stock prices?

We show that stock prices of firms with gender-diverse boards reflect more firm-specific information after controlling for corporate governance, earnings quality, institutional ownership and acquisition activity. Further, we show that the relationship is stronger for firms with weak corporate governance suggesting that gender-diverse boards could act as a substitute mechanism for corporate governance that would be otherwise weak. The results are robust to alternative specifications of informativeness and gender diversity and to sensitivity tests controlling for time-invariant firm characteristics and alternative measures of stock price informativeness. We also find that gender diversity improves stock price informativeness through the mechanism of increased public disclosure in large firms and by encouraging private information collection in small firms.     

Ownership concentration,foreign shareholding,audit quality,and stock price synchronicity: Evidence from China

This paper investigates the effects of largest-shareholder ownership concentration, foreign ownership, and audit quality on the amount of firm-specific information incorporated into share prices, as measured by stock price synchronicity, of Chinese-listed firms over the 1996–2003 period. We show that synchronicity is a concave function of ownership by the largest shareholder with its maximum at an approximate 50% level. Further, we find that synchronicity is higher when the largest shareholder is government related. We also find that foreign ownership and auditor quality are inversely associated with synchronicity. Finally, we show that the amount of earnings information reflected in stock returns is lower for firms with high synchronicity.     

Post-privatization state ownership and bank risk-taking: Cross-country evidence

We examine the relation between state residual ownership and bank risk-taking for privatized banks from 45 countries. Applying propensity score matching, we find that privatized banks tend to exhibit higher levels of risk-taking post-privatization than their publicly listed non-privatized counterparts. Moreover, partially privatized banks exhibit higher levels of risk-taking than fully privatized banks. We also observe a positive and significant relation between the level of residual state ownership and risk-taking. These findings are consistent with the distorted objectives associated with government control, as suggested by the political benefits of control, and with the soft budget constraint views of state ownership. The distortion can be mitigated by the quality of a country's institutional and regulatory environments. Finally, our results show that the effect of state ownership on risk-taking is more pronounced in countries with a higher dominance of state-owned enterprises, and it was more prevalent during the global financial crisis.     

The effect of CEO luck on the informativeness of stock prices: Do lucky CEOs improve stock price informativeness?

CEOs are “lucky” when they are granted stock options on days when the stock price is lowest in the month of the grant, implying opportunistic timing and severe agency problems (Bebchuk et al., 2010). Using idiosyncratic volatility as our measure of stock price informativeness, we find that lucky CEOs improve the informativeness of stock prices significantly. In particular, CEO luck raises the degree of informativeness by 4.39%. Powerful CEOs who can circumvent governance mechanisms and successfully practice opportunistic timing of options grants are so secured in their positions that they have fewer incentives to conceal information, thereby improving informativeness.     

Board structure and price informativeness

We develop and test the hypothesis that stock price informativeness affects the structure of corporate boards. We find a negative relation between price informativeness and board independence. This finding is robust to the inclusion of many firm-level controls, including firm fixed effects, and to the choice of the measure of price informativeness. Consistent with the hypothesis that price informativeness and board monitoring are substitutes, this relation is particularly strong for firms more exposed to both external and internal governance mechanisms and for firms in which firm-specific knowledge is relatively unimportant. Our results suggest that firms with more informative stock prices have less demanding board structures.     

Determinants of the informativeness of analyst research

We examine cross-sectional determinants of the informativeness of analyst research, i.e., their effect on security prices, controlling for endogeneity among the factors affecting informativeness. Analyst reports are more informative when the potential brokerage profits are higher (e.g., high trading volume, high volatility, and high institutional ownership) and lower when information processing costs (e.g., more business segments) are high. We also find that the informativeness of analyst research and informativeness of financial statements are complements.