Sunhwa Choi

Financial Statement Comparability and the Informativeness of Stock Prices About Future Earnings

We find that financial statement comparability enhances the ability of current period returns to reflect future earnings, as measured by the future earnings response coefficient (FERC). Thus, comparability improves the informativeness of stock prices and allows investors to better anticipate future firm performance. In addition, using both the FERC and stock price synchronicity tests, we find that comparability increases the amount of firm-specific information (rather than market / industry-level information) reflected in stock prices. Moreover, analysts play an important role in improving the ability of stock prices to incorporate firm-specific information because they produce more firm-specific information when comparability is higher.

Local Twitter Activity and Stock Returns

In this study, we use geographic proximity as a measure of private information and examine the informational role of social media in stock markets. Using a large sample of individual messages (tweets) collected from Twitter during the period July 2011–March 2012, we find that local Twitter users are more likely to tweet about firms with high information asymmetry, and their Twitter activity in turn increases the trading volume of local stocks. More importantly, we find that the negative tone of local tweets predicts future stock returns and subsequent earnings announcement returns, while nonlocal tweets present no such predictability. These results suggest that local social media activity reflects new information, contributing to price discovery. We also find that the negative tone of local tweets is associated with higher bid-ask spreads and lower market depths. This finding suggests that social media – in contrast to traditional news media, which reduce firms’ information asymmetry – serve to share information with an audience in their networks and therefore increase information asymmetry among investors. Overall, our findings suggest that local social media contain value-relevant information and affect firms’ information environments.