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Corporate events, return synchronicity and price efficiency

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  • Li, Fengyun
  • Petsas, Iordanis
  • Cai, Jinghan

Abstract

This paper examines a dilemma in the relationship between R2 and price efficiency: After comprehensively studying the R2 change around 7 well-known corporate events using Hong Kong stock market data, neither the traditional understanding of R2 as price inefficiency, nor the behavioral viewpoint of R2 as price efficiency can explain the observed R2 change around the events. We adopt an alternative methodology to replace the standard difference-in-difference regression and directly decompose the R2 change. We find that, due to the endogeneity of events, the changes of R2 are over-estimated. We further propose that in the event study setting, the R2 change may be simply the consequence of the inflow/outflow of some trend-chasing investors, and it may be detached from price (in)efficiency. Empirical evidence is consistent with this hypothesis.

Suggested Citation

  • Li, Fengyun & Petsas, Iordanis & Cai, Jinghan, 2020. "Corporate events, return synchronicity and price efficiency," The Journal of Economic Asymmetries, Elsevier, vol. 21(C).
    • Handle: RePEc:eee:joecas:v:21:y:2020:i:c:s1703494919300751
    DOI: 10.1016/j.jeca.2019.e00136
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    More about this item

    Keywords

    R2 Price efficiency; Information asymmetry; Short selling; Stock split; Return synchronicity;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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