Financial Reporting Quality and Noise in Stock Returns: Evidence from Chinese A-B Twin Shares

We examine how financial reporting quality affects the degree of noise in stock returns using the setting of Chinese A-B twin shares, which are shares for the same firm, traded on the same exchange, but with separate investor clienteles (i.e., mainly domestic versus foreign). We measure return noise using the correlation between firm-specific returns of A-B twin shares and find that higher financial reporting quality leads to less return noise, both in panel regressions and using China's 2007 accounting standard reform as an exogenous shock to financial reporting quality. We also find that returns are less noisy around earnings announcements than during other trading days. Our results suggest that higher-quality financial reporting can reduce the degree of noise in returns and make returns more efficient. JEL Classifications: G14; G15; M41.