The Effect of Disclosure and Information Asymmetry on the Precision of Information in Daily Stock Prices

We examine the effect of public disclosure and information asymmetry on the precision of information in daily stock prices. Daily prices move because of information but also because of noise, and noise-driven movements will presumably not endure in the long run. We find that returns on earnings announcement days more precisely reflect the change in the long-term value of the firm, whereas returns on nonannouncement days contain relatively more noise. Disclosure increases precision also on nonannouncement days, and firms providing guidance during the quarter have less noisy returns. Moreover, we find that stocks with lower information asymmetry have more precise daily returns, because liquidity and other noninformative trades that increase noise have a smaller impact on their prices. Prices that reflect value more precisely will reduce investor risk when trading the individual stock. We find that the precision of information in daily stock prices is also associated with lower expected returns.