Publication Type

Journal Article

Publication Date

5-2011

Abstract

ln frictionless capital markets with complete information and rational investors, stock prices adjust to new information instantaneously and completely. However, a substantial body of research studies information imperfections such as asymmetric information and incomplete information. Information imperfections potentially hinder timely price discovery and are likely associated with delayed stock price adjustment to information. Our first research question therefore is whether the quality of accounting information (or ”accounting quality”) is one such information imperfection that is associated with cross-sectional variation in stock price delay. We define accounting quality as the precision with which financial reports convey information to equity investors about the firm’s expected cash flows. Poor accounting quality is likely associated with higher expected returns through uncertainty about stock valuation parameters and incomplete information. Our second research question therefore is whether the accounting quality component of price delay is associated with higher future stock returns. Consistent with our hypotheses, the results show that poor accounting quality is associated with delayed price adjustment and higher future stock returns. Thus, accounting quality plays a role in timely stock price discovery.

Keywords

Accounting Quality, Market Frictions, Stock Price Delay, Expected Returns

Discipline

Accounting

Research Areas

Financial Performance Analysis

Publication

Contemporary Accounting Research

Volume

30

Issue

1

First Page

269

Last Page

295

ISSN

0823-9150

Identifier

10.1111/j.1911-3846.2011.01154.x

Publisher

Canadian Academic Accounting Association

Additional URL

http://doi.org./10.1111/j.1911-3846.2011.01154.x

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