Corporate events, return synchronicity and price efficiency

Fengyun Li, Iordanis Petsas and Jinghan Cai

The Journal of Economic Asymmetries, 2020, vol. 21, issue C

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.

Keywords: R2 Price efficiency; Information asymmetry; Short selling; Stock split; Return synchronicity (search for similar items in EconPapers)
JEL-codes: G14 G15 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:joecas:v:21:y:2020:i:c:s1703494919300751

DOI: 10.1016/j.jeca.2019.e00136

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