Investor Protection, Firm Fundamentals Information and Stock Price Synchronicity
This paper reports a cross-country study on the use of firm fundamentals information (FFI) in capital market pricing decisions with institutional arrangements for investor protection (IP) as a moderating variable. We use accounting accruals information (AAI) as a proxy for FFI and stock price synchronicity (SPS) as a measure of use of FFI and other information in capital market pricing decisions. Morck, Yeung and Yu (MYY) (2000) posit that when the information environment in a capital market is more developed, investors use FFI of firms in making investment decisions and this lowers SPS. Conversely, when the information environment in a capital market is less developed, investors rely more on market information in making investment decisions and this increases SPS. Using data from 1995 to 2010 for the 40 countries of MYY, we find that AAI is associated with SPS only when IP levels are high, which suggests that investors rely on FFI in making investment decisions when IP is stronger.