Empirical Investigation of the Link between Systematic Risk and Precision of Information
S. R. Mohamed* (Lecturer, the Institute of Finance Management (IFM), and has a Ph.D. (Finance) from the University of Strathclyde, Scotland, UK. He has Lectured at the University of Strathclyde, IFM and UDSM. )
Download Article | Published On 12/02/2004

Abstract

The analytical work of Kim and Verrecchia (henceforth KV, 1991a, 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 in fundamental value 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 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 release dates. Overall, the evidence presented in this paper is consistent with the predictions of KV.

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