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The price of firm-level information uncertainty

Author

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  • Wang, Xi
  • Gao, Chao
  • Wang, Tianfu

Abstract

Firm-level uncertainty is difficult to measure in nature. We construct a new measure of firm-level information uncertainty based on uncertainty premium implied by earnings announcement returns. This new measure fundamentally differs from other firm-level uncertainty measures. We find that high-uncertainty firms outperform low-uncertainty firms by 9.59 % per annum on a risk-adjusted basis. Furthermore, this return predictability persists for up to five quarters. Our uncertainty measure and its return predictability are primarily driven by the idiosyncratic component. Overall, our results support the existence of an uncertainty premium and cast doubt on the hedgeability of uncertainty.

Suggested Citation

  • Wang, Xi & Gao, Chao & Wang, Tianfu, 2024. "The price of firm-level information uncertainty," Finance Research Letters, Elsevier, vol. 67(PA).
    • Handle: RePEc:eee:finlet:v:67:y:2024:i:pa:s1544612324008122
    DOI: 10.1016/j.frl.2024.105782
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    More about this item

    Keywords

    Uncertainty; Stock Return Predictability; Earnings Announcements; Hedging;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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