Size, Value and Momentum Premiums: Evidence from Empirical Pricing Models

In a perfect capital market where investors make decisions in a rational manner and there is complete information regarding the assets being traded, the information quickly is and fully reflected in stock prices. However, many studies (such as Barry and Brown, 1984; Akins, Ng and Verdi, 2012) indicate a lack of complete information on the markets. Incomplete and vague information affects stock prices at lower speeds and prevent from timely stock prices discovery (Verrecchia, 1980; Callen, Govindaraj and Xu, 2000). From the viewpoint of investors, some stocks that are more attractive than other stocks get the attention of most investors who follow the news and information on those stocks. In this condition, the news and information are reflected in the prices of mentioned stocks more quickly than other stocks. However, there are stocks that are less attractive to investors and the relevant information, thus their prices are adjusted in lower speeds. In accounting and finance literature, this subject is named Stock Price Delay (Hirshleifer, and Teoh, 2006; Callen, Khan, and Lu, 2012).The available information on firms is usually voluminous and the most of investors have limited ability to process the high volume of information. In this condition, in order to make investment decisions, they spend more time and collect further and precise information. This causes the information to be reflected in stock prices with time delay. Also, the low quality of issued information and information asymmetry increase the ambiguity of information and decrease the reflection rate of information on stock prices.
The importance of research in this area arises from the fact that when information is reflected in the stock price with more delay, the informational efficiency of capital market will disappear. In this market the prices do not reflect the intrinsic value of stock and the capital markets cannot allocate their resources among firms optimally (Callen, Khan, and Lu, 2012). Therefore, identification of factors affecting the phenomenon of stock price delay and dealing with them can increase the informational and allocative efficiency of capital market.
Research Hypotheses: The purpose of this study is to investigate the effect of financial reporting quality and information asymmetry on stock price delay. To this end, based on the research objective, the theoretical framework and previous researches, the research hypotheses are as follows: H-1: The financial reporting quality is negatively associated with stock price delay.
H-2: The information asymmetry is positively associated with stock price delay.
To investigate and compare the effect of financial reporting quality and information asymmetry on stock price delay simultaneously, the third hypothesis is as follows: H-3: The intensity of the relationships between the financial reporting quality and information asymmetry with stock price delay are not significantly different from each other.
This research is an applied, quantitative and retrospective study. The research data are gathered from Rahavard Novin database, the Codal site, the site of Tehran stock exchange organization referring to its data archives. To measure the dependent variable (stock price delay), the approach of Hou, and Moskowitz (2005) is used. To calculate the information asymmetry, the presented measure by Venkatesh and Chiang (1986) is applied and to measure the financial reporting quality, data on disclosure quality scores, are obtained from TSE announcement of “Corporate Rating based on Disclosure Quality and Appropriate information”. This research, investigates the effects of financial reporting quality and information asymmetry on the stock price delay from 2003 to the end of 2013 in a sample including 112 firms listed in Tehran Stock Exchange. To test the research hypotheses, the multivariate regressions with panel data are applied.
The research results show that the increase in financial reporting quality and decrease in information asymmetry among stock traders decreases the stock price delay. On the other hand, financial reporting quality (information asymmetry) is negatively (positively) related to stock price delay.
Discussion and In a capital market with rational investors and existence of complete information, such information is quickly and completely reflected in stock prices. However, the voluminous studies review the information imperfections (such as asymmetric information and low quality of information (e.g., Barry and Brown, 1984; Merton, 1987; Easley, Hvidkjaer, and O’Hara, 2002; Hou and Moskowitz, 2005; Lambert, Leuz, and Verrecchia, 2007; Akins, Ng, and Verdi, 2012). They find that the incomplete and ambiguous information decrease the reflection speed of information in stock prices.
This research shows that the increase in reporting quality increases the reflection speed of information in stock prices and thus decreases the stock price delay. The reason is that an increase in reporting quality decreases the ambiguous aspects of information, thus the investors spend less time on process information and make less mistakes in stock pricing. This leads to the information to be more quickly and more accurately reflected in the stock price. These results are consistent with the findings of Callen, Khan, and Lu (2012), Javanmard, M., & Pourmousa (2013), Pourzamani and Ghamari (2014) and Hassas Yegane and Omidi (2014). Also, this research investigates the relationship between information asymmetry and stock price delay and finds that an increase in information asymmetry decreases the reflection speed of information in stock prices and increases the stock price delay. This is because in information asymmetry environment, to make investment decisions, investors are faced with a high degree of uncertainty and risk. For this reason, to decrease the risk of investment decisions, they spend more time and collect more accurate information causing the information to be reflected in the stock price with more time delay. This finding is comparable to the results of Gordon and Wu (2014). Also, the research results show that the relationship between financial reporting quality and stock price delay is significantly stronger than that of information asymmetry and the mentioned variables cannot be used interchangeably.
Based on the research results and the negative consequences of stock price delay, the managers are advised to provide high quality financial reporting and prevent the mentioned phenomenon. Also, the practitioners of financial market are advised to select and execute the appropriate policies and increase the transparency of information because this leads to informational and allocative efficiency of capital market. Because of the importance of identification of factors affecting the stock price delay and dealing with them, the researchers are advised to study the effect of macroeconomics factors (such as exchange rate fluctuations, oil prices and inflation rate) on stock price delay.