Is Stock Price Synchronicity a Measure of Noise or Stock Price Informativeness: Evidence from Audit Pricing Model

Abstract

It is an unsettled issue of whether stock price synchronicity (hereafter SYN) measures market-wide noise or market-wide informativeness. The Sarbanes-Oxley Act (hereafter SOX) provides an experimental setting to re-examine the issue of SYN. As internal control reports and assessments required by SOX are available to the stock market in annual reports, this market-wide financial statement-related information will affect auditors’ risk assessment and therefore audit work and consequently audit fees as well. Using this experimental setting, this study uses an audit pricing model to examine the relation between audit fees and SYN.

Using a sample consisting ofU.S.firms from 2004 to 2006, the study documents a significantly positive relation between audit fees and SYN only in year 2004, but insignificant relations in years 2005 and 2006. The results are consistent with SYN representing market-wide financial statement-related information in 2004 when a regulatory change in financial statements due to SOX; while SYN representing market-wide noise (i.e. non-financial statement-related information) in 2005 and 2006.