Less is More: Are Less Synchronous Stock Prices More Informative?

Even though previous studies on the relationship between synchronicity and informativeness focus exclusively on the stock return, two important reasons prompt us to investigate this relationship for the (scaled) stock price. First, since the price level summarizes the stock of earnings information already incorporated whereas the return measures the flow, they need not convey the same information: Just because the flow of information as conveyed by returns is high in a given year does not necessarily mean that the stock of information already contained in the price level also has to be high. Second, for certain potential users of financial information, such as corporate managers and long-term investors making investment or portfolio decisions, their concern is the stock of long-horizon earnings information contained in a firm's current stock price. Given the stock of information in the most recent price level, the flow of information as revealed by the stock return is no longer their immediate concern. When investors' expectations are rational, and for a given cross-sectional dispersion in future fundamentals, we show theoretically that less synchronous prices do contain more information on future earnings. Within a unified empirical framework, we find support for this theoretical relationship at five different levels in the U.S. market: (i) for the cross section of all firms, over time: the cross-sectional price differences across all firms in the market are more informative (i.e. they reflect a larger fraction of all inter-firm variations in future earnings) at times when the market-wide price synchronicity is lower; (ii) within the same industry, over time: the stock price differences across all firms in the same industry are more informative (i.e. they reflect a larger fraction of all inter-firm variations in future earnings within the same industry) at times when the intra-industry price synchronicity is lower; (iii) across different industries, at the same time: those industries whose price synchronicity is lower have more informative stock prices (i.e. they reflect a larger fraction of all intra-industry, inter-firm variations in future earnings); (iv) between two groups of firms in the market, at the same time: the group of firms whose price synchronicity with the market average is low have more informative stock prices (i.e. they reflect a larger fraction of all within-group, inter-firm variations in future earnings); (v) between two groups of firms in the same industry, at the same time: the group of firms whose prices are less synchronous with its industry average have more informative stock prices (i.e. they reflect a larger fraction of all within-group, inter-firm variations in future earnings). Between return synchronicity and price informativeness, we find that they are only weakly related unconditionally, but their relationship can become conditionally significant, depending on the values of certain state variables.