Public information arrivals, stock price formation and market efficiency

Abstract

This thesis consists of three related studies on the relationship between public information arrivals, stock price formation, and market efficiency in the Australian Securities Exchange (ASX). The common theme of these three studies lies in the investigation of a distinctive proxy of public information arrivals at the firm level, which is the intensity of time-stamped announcements of companies listed in the ASX. The first study examines how public information arrivals affect stock return volatility of individual firms. Due to data limitation associated with a flow of time-stamped news at the firm level, prior studies often focus on documenting this relationship at the daily frequency or with an event study. Taking advantage of the distinctive proxy for public information made available by the ASX, this study documents that a positive relationship exists between public information arrivals and intraday volatility of stock returns at the firm level. Moreover, it finds that the effects of public information arrivals on stock return volatility become weaker if the sampling frequencies change from the intraday interval to the daily interval, or if a stock is smaller or less liquid. Overall, this study highlights the importance role of the flow of time-stamped announcements of companies listed in the ASX as a source of public information that generates significant intraday stock return volatility at the firm level. The second study analyses how the arrivals of new public information influence the process by which trades and quotes move stock prices during the normal trading hours. Prior studies show that information contained in the limit order book is related to stock price changes. This study finds that public information arrivals increase the informativeness of the limit order book on short-term stock returns, and that public information arrivals also strengthen the relationship between trading volume and stock return volatility, and between the slope of the limit order book and stock return volatility. In sum, this study suggests that public information arrivals improve the informational content of the limit order book. The third study focuses on the pre-opening period in the ASX and examines the impact of order placement during this period on the final opening price under different information arrival conditions. The existing literature in this area has documented that despite there being no or little trading, the pre-opening period still facilitates price discovery. This study adds to the existing literature by documenting that public information arriving before or during the pre-opening period increases the efficiency of the indicative opening price. Moreover, it finds that market depth, order size, stock return volatility and company announcements are the determinants of order aggressiveness during the pre-opening period, highlighting the important role of public information in facilitating price discovery during this period.