Managerial ability and idiosyncratic volatility

Xi Wu, Xinle Tong and Yudong Wang

International Journal of Finance & Economics, 2022, vol. 27, issue 2, 2566-2581

Abstract: This paper investigates the impact of managerial ability on idiosyncratic volatility from the perspective of corporate information. Using the companies listed on the Shenzhen A‐share Main Board from 2003 through 2017, we test the relationship between managerial ability and the quality of information disclosure. We further explore the internal mechanism by which managerial ability impacts on idiosyncratic volatility. The empirical results show that competent managers reduce idiosyncratic volatility by improving corporate transparency. In other words, corporate transparency plays an intermediary role. Competent managers disclose higher quality information. In turn, reputable management and high‐quality company information attract more attention and information mining. This improves corporate transparency, which can reduce arbitrage space and alleviate the idiosyncratic volatility of the stock price. Our main findings survive a series of robustness tests including an alternative measure of managerial ability, the application of a 2SLS regression and so on.

Date: 2022
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