The asymmetric impact of positive and negative news on stock return synchronicity

Abstract

I examine the asymmetric impact of positive and negative information on stock return synchronicity that occurs from a change in short-sale constraints. Using a unique Chinese dataset that segments the trading activity of individual and institutional investors, I am able to observe each investor group’s relative preference for incorporating firm-level as opposed to market-level negative information. My results show the existence of an asymmetric impact. Moreover, institutional (individual) traders impound more firm-specific (market-wide) negative information relative to market-wide (firm-specific) negative information when they are allowed to short-sell. These findings suggest that the sentiment of the information that is being released plays a significant role in determining the level of stock return synchronicity. The extent to which firm-specific negative information is impounded into prices because of the change of short-sale constraints depends on investor type.