Accounting Information Quality and the Clustering of Stock Prices

Ahmed Baig, Benjamin Blau () and Jie Hao
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Ahmed Baig: Lahore University of Management Sciences
Jie Hao: Susquehanna University

American Business Review, 2020, vol. 23, issue 2, 182-210

Abstract: The foundation of economic theory is based on the premise that prices will converge to their equilibrium value. However, prior research has documented that stock prices cluster on round pricing increments. In this study, we develop and test the hypothesis that audit quality and the management of earnings—both of which affects the information environment of the firm—influence the degree of price clustering. Results show that firms with Big 4 auditors have less clustering in their stock prices while firms with higher abnormal audit fees, more discretionary accruals, and firms that tend to manipulate earnings have a higher degree of price clustering. These findings support our hypothesis and suggest that accounting information quality helps explain the price clustering anomaly and subsequently influences the efficiency of financial markets.

Keywords: Price Clustering; Round Prices; Big 4; Earnings Manipulation (search for similar items in EconPapers)
JEL-codes: B20 (search for similar items in EconPapers)
Date: 2020
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