The Relationship between Firm-Specific Return Variation and Price Informativeness: Some Cross-Sectional Evidence

The progressive removal of short-selling constraints in the Chinese stock market provides us with a natural experiment to investigate the relationship between firm-specific return variation (FSRV) and price informativeness. Based on the empirical finding that idiosyncratic volatility is a satisfied proxy for FSRV when the information environment for individual firms improves, we mainly find that the FSRV is negatively related to price informativeness. This negative relationship is robust to alternative model specifications, alternative proxies for price informativeness, and alternative estimation windows. Generally speaking, our results complement the extant literature on the mixed relationships between FSRV and price informativeness by providing cross-sectional evidence.