Thesis advisor: Pierluigi Balduzzi / Essay one of this dissertation investigates the relation between fundamental idiosyncratic volatility and stock returns idiosyncratic volatility using data from 56 countries over 1980-2014. I find a strong positive relation between fundamental idiosyncratic volatility and idiosyncratic volatility of returns. This association, however, seems to be entirely driven by the developed economies and I find no effect in the emerging markets. Specifically, fundamental idiosyncratic volatility does not lead to more idiosyncratic return volatility in countries with poor legal institutions and weak shareholder protection laws. The second essay examines the effect of accounting standards on return predictability by using a variance decomposition approach, and is joint work with Pierluigi Balduzzi, Gil Sadka, and Ronnie Sadka. We decompose returns into a cash-flow news component and a discount-rate news component, and investigate cross-sectional and time-series changes in the contribution of each component to return variations. We also decompose returns for 20 industries in three subsample periods to examine the effect of accounting standards on different industries over time. Our results contribute to our understanding of the effect of accounting practices on accounting variables and return predictability. The third essay studies the effect of short-selling on stock price informativeness. Morck, Yeung, and Yu (2000), in their pioneering study of international differences in stock price synchronicity, emphasize the effect of market development on the ability of investors to incorporate firm-specific information into prices. I use a unique institutional feature in the Hong Kong market to investigate one of the important tools investors use to incorporate information into prices and hence, reduce stock price synchronicity; short-selling. Examining the cross-sectional and time-series variation in short-sale constraints in the Hong Kong market, I find that following the removal of short-sale constraints, stock prices become more informative and move less in tandem with the market. My findings contribute to our understanding of the impact of short-sales constraints on stock price informativeness. / Thesis (PhD) — Boston College, 2016. / Submitted to: Boston College. Carroll School of Management. / Discipline: Finance.

The objective of this thesis is to explain the behaviour of stock returns around the disclosure of different types of information release by UK companies. Previous literature has documented the existence of both market anticipation and the lagged impounding of value relevant information. The main objective of this research is, therefore, to identify the conditions under which investors choose to be informed in anticipation of and in response to, a corporate disclosure. More specifically, we explain the behaviour of stock returns in terms of the costs and benefits which investors must consider when deciding whether to acquire and interpret information. The results indicate that market anticipation is an increasing function of firm size, the number of years a firm has been trading and the volatility of prior stock returns. However, increased voluntary disclosure by firms would appear to reduce the ability of investors to and anticipate and interpret information. The volatility of stock returns, prior to the disclosure, is nevertheless the main driving force behind the explanation of post-announcement drift. There are also indications that investors' initial reactions to both earnings and non-earnings news are not based on informed judgements, and that bad news is generally associated with greater uncertainty than good news. Bad news would appear to be more difficult to anticipate and interpret, relative to good news. On further examination, however, investor anticipation is shown to be largely based on information as opposed to uninformed trading.

The primary aim of this study is to investigate the stock return volatility surrounding management earnings forecasts. Disclosure by managers of expected earnings are particularly important communications, and as such, it is important to understand the capital market implications surrounding them. In doing so, the research questions are essentially aimed at examining the stock return volatility, first, at the release of a management earnings forecast, and second, at the eventual announcement of the realised earnings for that period. The first test investigates whether there is an increase in volatility surrounding a management earnings forecast for those firms who release them compared to a matched-firm sample of firms without a management earnings forecast at that date, and then further examines that result based on different forecast antecedents and forecast characteristics. Next, this study tests, for firms who do release a management earnings forecast during the year, whether stock volatility is lower than firms who do not release a management earnings forecast at the eventual earnings announcement date. In brief, the evidence using the Garman and Klass [1980] ???best analytic scale-invariant estimator??? of volatility in an Australian context, between 1993 and 2003, finds that stock return volatility is greater for bad news forecasts, forecasts of low specificity, and forecasts issued by firms perceived ex ante as being of lower credibility using both permutation analysis and modelling daily volatility. At the earnings announcement date, however, there is no evidence that stock return volatility is lower for firms that issue management earnings forecasts during the year. Overall, this result challenges the information asymmetry argument in the literature that disclosure will reduce volatility in the long-run.

This dissertation consists of three stand-alone essays on fundamental uncertainty, stock return volatility and earnings management. The first study investigates the role of information about firms?? fundamentals contained in analysts?? forecasts (which I label ??non-accounting information??) in understanding stock return volatility. When combined with Ohlson??s (1995) linear information dynamics, the accounting version of the Campbell-Shiller model (Campbell and Shiller 1988a, 1988b; Vuolteenaho 2002) implies that if current non-accounting information is more uncertain, then future stock returns are expected to be more volatile. The empirical evidence supports the theoretical predictions, and the results are valid for measures of both systematic and idiosyncratic volatility. Additional analysis yields some evidence that both favourable and unfavourable news from non-accounting information increases future stock return volatility. Overall, the results highlight the value relevance of information in analysts?? forecasts beyond what is contained in the current financial statements. The second essay extends the theoretical framework of Callen and Segal (2004) and Vuolteenaho (2002) to investigate the association between the uncertainty of accrual information and stock return volatility. The empirical evidence supports the theoretical prediction that the extent of uncertainty in accounting accruals is increasing with the volatility of future stock returns, and the results are valid for measures of both systematic and idiosyncratic volatility. However, when accrual variability is decomposed into fundamental and unexpected portions, I find that the positive relationship between accrual variability and future stock return volatility is dominated by the fundamental component of accrual variability. The findings therefore suggest that the market places little weight on information conveyed by that component of accounting accruals that is most likely to reflect accounting choices, implementation decisions and managerial opportunism. The final essay argues that the presumed articulation among accruals, cash flows and revenues does not capture decisions on expected accruals when large external financing activities are present. The analysis provides evidence that managers?? ??normal?? operating decisions associated with net external financing activities are likely to lead to measurement errors in unexpected accruals that are part of expected accruals, and erroneous conclusions that significant earnings management exists when in fact there is none. This is especially pertinent in cases where the partitioning variable used to identify instances of earnings management is supposed to be uncorrelated with external financing, when in fact it is correlated. The results underscore the importance of additional specification tests being conducted to control for estimation biases in unexpected accruals associated with external financing. I suggest the use of matched-firm approach using industry and external financing matches in order that reliable and warranted inferences are made.

This dissertation consists of three stand-alone essays on fundamental uncertainty, stock return volatility and earnings management. The first study investigates the role of information about firms?? fundamentals contained in analysts?? forecasts (which I label ??non-accounting information??) in understanding stock return volatility. When combined with Ohlson??s (1995) linear information dynamics, the accounting version of the Campbell-Shiller model (Campbell and Shiller 1988a, 1988b; Vuolteenaho 2002) implies that if current non-accounting information is more uncertain, then future stock returns are expected to be more volatile. The empirical evidence supports the theoretical predictions, and the results are valid for measures of both systematic and idiosyncratic volatility. Additional analysis yields some evidence that both favourable and unfavourable news from non-accounting information increases future stock return volatility. Overall, the results highlight the value relevance of information in analysts?? forecasts beyond what is contained in the current financial statements. The second essay extends the theoretical framework of Callen and Segal (2004) and Vuolteenaho (2002) to investigate the association between the uncertainty of accrual information and stock return volatility. The empirical evidence supports the theoretical prediction that the extent of uncertainty in accounting accruals is increasing with the volatility of future stock returns, and the results are valid for measures of both systematic and idiosyncratic volatility. However, when accrual variability is decomposed into fundamental and unexpected portions, I find that the positive relationship between accrual variability and future stock return volatility is dominated by the fundamental component of accrual variability. The findings therefore suggest that the market places little weight on information conveyed by that component of accounting accruals that is most likely to reflect accounting choices, implementation decisions and managerial opportunism. The final essay argues that the presumed articulation among accruals, cash flows and revenues does not capture decisions on expected accruals when large external financing activities are present. The analysis provides evidence that managers?? ??normal?? operating decisions associated with net external financing activities are likely to lead to measurement errors in unexpected accruals that are part of expected accruals, and erroneous conclusions that significant earnings management exists when in fact there is none. This is especially pertinent in cases where the partitioning variable used to identify instances of earnings management is supposed to be uncorrelated with external financing, when in fact it is correlated. The results underscore the importance of additional specification tests being conducted to control for estimation biases in unexpected accruals associated with external financing. I suggest the use of matched-firm approach using industry and external financing matches in order that reliable and warranted inferences are made.

The impact of the introduction of derivatives on the underlying stock is a debatable topic among the researchers. The issue is quite controversial as contradictory results have been obtained by researchers in various stock markets. The purpose of this study is to examine the volatility and the liquidity effect on the underlying stock after the introduction of index options. We have investigated volatility and liquidity effect by collecting sample data from the stock markets of India, Korea, Taiwan, Hong Kong, Japan, Thailand, Malaysia and Singapore, only markets which are offering index options in Asia.   Applying the generalized autoregressive conditional heteroscedasticity (GARCH) model, we have examined the conditional volatility of intraday (high frequency) returns for each stock market, before and after the introduction of index options. We have also examined the liquidity effect through t-test and Wilcoxon Signed Rank Test. We used t-test to determine the mean differences between the trading volume of pre-index and post-index options periods.    By comparing the estimated parameters and the coefficient of conditional volatility in pre and post period of index options introductions, we have examined that the derivatives trading dramatically increases the persistence of the conditional volatility for all the selected stock markets. We also observed mixed evidence in context to liquidity effect. In the stock exchanges of Hong Kong, Japan, Korea, Taiwan and Thailand, we found that the respective markets become more liquid in the post index options periods in contrast to pre index options period. In these markets trading volume increased significantly after the introduction of index options.  On the other hand, India, Malaysia and Singapore stock markets show no liquidity effect in the post-index option period.   Finally, the empirical results of our study conclude that the introduction of index options on the selected Asian stock markets have increased in stock return volatility and liquidity on the underlying stocks.