Empirical Investigation of the Link Between Systematic Risk and Precision of Information
AbstractThis paper investigates the link between systematic risk and other firm's characteristics around earnings and divided announcements. The analysis uses a sample of 212 securities drawn from the London Stock Exchange for the period January 1990 to December 1998.
The analytical work of Kim and Verrecchia (henceforth BV, 1001a, 1997) predict that the variance of price change is increasing in the precision of the announcement but decreasing in the amount of pre-announcement information. The paper shows analytically that the implication of KV's predictions on volatility carry over to systematic risk of securities as well. Their predictions are tested using empirical surrogates for the quality of pre-announcement information and the precision of news releases based on fundamental values of sample firms. After controlling for contemporaneous correlation, changes in the degree of operating and financial leverage, and other firm characteristics that are thought to be associated with changes in systematic risk, we find that the level of systematic risk around earnings and dividends announcements is negatively related to the amount of pre-announcement information. Specifically, all else being equal, we document relatively small shifts in beta around anticipated announcements of large firms. The opposite is true for small firms.
We also document a positive association between the proxy for the precision of the announced news and the level of systematic risk around earnings and dividends released dates.
African Journal of Finance and Management Vol.12(2) 2004: 1-14