Information arrival, changes in R-square and pricing asymmetry of corporate news

• DOI: 10.1016/j.iref.2014.03.004
• Publication Date: 2014-03-24T18:00:21Z
• Authors: Louis T.W. Cheng; T.Y. Leung; Wayne Yu
• Keywords: Stock (firearms); Synchronicity; Square (algebra)

Abstract Previous research on R-square has focused on the cross-sectional effects of the level of R-square and the results are mixed. We argue that changes in R-square can capture how new information is incorporated into stock prices. We examine the changes in R-square and stock price synchronicity upon compliance disclosures of earnings and regulatory reprimanding disclosures of “special treatment” status in China. Our results show that upon information arrival, R-square decreases because of the increase in firm-level information from the announcements, a result that is consistent with our hypothesis. Moreover, the market is more reactive in pricing bad rather than good news.