Transparency, Price Informativeness, and Stock Return Synchronicity: Theory and Evidence

This paper argues that, contrary to the conventional wisdom, stock return synchronicity (or <italic>R</italic>²) can increase when transparency improves. In a simple model, we show that, in more transparent environments, stock prices should be more informative about future events. Consequently, when the events actually happen in the future, there should be <italic>less</italic> “surprise” (i.e., less <italic>new</italic> information is impounded into the stock price). Thus a more informative stock price today means higher return synchronicity in the future. We find empirical support for our theoretical predictions in 3 settings: namely, firm age, seasoned equity offerings (SEOs), and listing of American Depositary Receipts (ADRs).