Syn. Analysts, Piotroski, 2004

The Influence of Analysts, Institutional Investors, and Insiders on the Incorporation of
Market, Industry, and Firm-Specific Information into Stock Prices

Author(s): Joseph D. Piotroski and Barren T. Roulstone
Source: The Accounting Review, Vol. 79, No. 4 (Oct., 2004), pp. 1119-1151
Published by: American Accounting Association
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THE ACCOUNTING REVIEW
Vol. 79, No. 4
2004
pp. 1119-1151
The Influence of Analysts, Institutional

Investors, and Insiders on the
Incorporation of Market, Industry,
and Firm-Specific Information
into Stock Prices
Joseph D. Piotroski
Darren T. Roulstone
University of Chicago
ABSTRACT: We investigate the extent to which the trading and trade-generating ac-
tivities of three informed market participants-financial analysts, institutional investors,
and insiders-influence the relative amount of firm-specific, industry-level, and market-
level information impounded into stock prices, as measured by stock return synchron-
icity. We find that stock return synchronicity is positively associated with analyst fore-
casting activities, consistent with analysts increasing the amount of industry-level
information in prices through intra-industry information transfers. In contrast, stock re-
turn synchronicity is inversely related to insider trades, consistent with these transac-
tions conveying firm-specific information. Supplemental tests show that insider and
institutional trading accelerate the incorporation of the firm-specific component of fu-
ture earnings news into prices alone, while analyst forecasting activity accelerates both
the industry and firm-specific component of future earnings news. Our results suggest
that all three parties influence the firm's information environment, but the type of price-
relevant information conveyed by their activities depends on each party's relative in-
formation advantage.
Keywords: stock return synchronicity; insider trading; institutional ownership; financial

Analysts.
JEL Classification: G14.
We thank Ben Ayers, Ray Ball, Mark Finn, Frank Heflin, two anonymous referees and workshop participant
Northwestern University, the University of Pennsylvania, The University of Arizona, London Business Sch
State University of New York at Buffalo, University of Notre Dame, The University of Texas, and Washingt
University's 2002 Financial Accounting mini-conference for helpful comments and suggestions on a prior draft o
this manuscript. Analyst forecasts have been generously provided by I/B/E/S International. We gratefully
knowledge the financial support of the University of Chicago Graduate School of Business. Professor Piotr
acknowledges the financial support of the William Ladany Faculty Research Fund at the University of Chic
Graduate School of Business. All errors are our own.
Editor's note: This paper was accepted by Lawrence Brown, Editor.

Submitted July 2003
Accepted February 2004
1119
1120 Piotroski and Roulstone
I. INTRODUCTION
n individual firm's stock price reflects market-level, industry-level, and
information. King (1966) shows that stock prices covary with market a
returns, but Roll (1988) observes that a significant portion of stock retu
is not attributable to general market and industry movements, suggesting that th
movements represent the impounding of firm-specific information into prices. De
conclusions, little research has examined why some firms exhibit more stock
chronicity than others in U.S. markets. We address this issue by investigating
which the trading (and trade-generating) activities of three informed market
insiders, institutional investors, and financial analysts-influence the relativ
firm-specific, industry-level, and market-level information impounded into s
measured by stock return synchronicity.
Consistent with prior research (Durnev et al. 2003), we define stock return syn
as the extent to which market and industry returns explain variation in firm
returns. Measured as a logarithmic transformation of the R2 from a modified
including current and lagged market and industry returns, stock return synch
estimate of the relative amount of firm-specific versus industry- and marke
mation influencing prices over the fiscal year. In this framework, firms displayin
stock return synchronicity, ceteris paribus, have a relatively greater amount of f
(market-level and industry-level) information impounded into their stock p
research by Wurgler (2000), Durnev et al. (2004), DeFond and Hung (2004), a
et al. (2003) provide evidence supporting this interpretation of stock return s
Given these findings, we use stock return synchronicity as a benchmark to
impact of insider, institutional investor, and financial analyst activity on the rela
of market-level, industry-level, and firm-specific information incorporated into p
Existing research establishes an informational role for insiders, institution
and financial analysts, yet the extent to which their activities differentially
impounding of market, industry, and firm-level information is unknown. To the
these parties contribute different information into the price formation process o
tially influence the dissemination and incorporation of common (i.e., industry
information, stock return synchronicity should vary with the presence or ab
parties' activities. Specifically, each party's relation with stock return synchr
be a function of its relative advantage with respect to obtaining, interpreting
inating market-wide, industry-level, and firm-specific information. As suc
prices to be less (more) synchronous in the presence of insiders' (outsid
activities.
The actions of insiders, institutional investors, and financial analysts gener
uum of informed trade that influences stock prices. By definition, insiders (i
executives and directors) are the most informed party with respect to the firm's
risks, and opportunities. Given the insider's firm-level information advantage
tween insider trading activities and the flow of firm-specific information int
most direct. For example, Manne (1966a, 1966b) suggests that managers comm
private information to market participants through their trading behavior. S
search supports the conclusion that insider trades reveal private, firm-specifi
not impounded in price (Seyhun 1992, 1998; Meulbroek 1992; Damodoran and
Ke et al. 2003; Piotroski and Roulstone 2005). To the extent that these tradi
do not crowd out the trading behavior of other market participants, greater i
activity should improve the informational efficiency of a firm's stock price w
firm-specific information, reducing stock return synchronicity.
The Accounting Review, October 2004
The Influence of Analysts, Institutional Investors, and Insiders 1121
In contrast, institutional investors can be either quasi-insiders or outsiders dependi

on their ownership stake and long-term trading behavior (Bushee 1998). Prior researc
suggests that institutions influence a firm's information environment and price forma
process (Utama and Cready 1997; El-Gazzar 1998; Jiambalvo et al. 2002; Collins et
2003). To the extent that institutional investment decisions are influenced by private in
mation, changes in the institutions' holdings will convey information (Chakravarty 20
The type of information possessed by institutions and conveyed by their trades should
a function of their pre-trade ownership stake and trade size. For example, significant le
of institutional ownership should be associated with greater monitoring and increased ac
to firm-specific information, possibly facilitating information transfers across like firms in
the institution's portfolio. Moreover, large changes in holdings are relatively more likel
be driven by private information, while small trades are relatively more likely to be dr
by rebalancing and liquidity considerations. Since the type of information conveyed
institutions is a complex function of trade size, pre-trade ownership stake, and the sou
of information, the expected relation between institutional trades and stock return synchro
nicity is ambiguous.
Financial analysts are outsiders who generally have less access to firm-level, idios
cratic information than either management or significant institutional investors. As s
analysts could focus their efforts on obtaining and mapping industry- and market-l
information into prices. Evidence suggests such industry-level preferences exist. For
ample, Clement (1999) and Jacob et al. (1999) show that analyst accuracy improves wi
industry specialization, while Gilson et al. (2001) show that the composition of analys
coverage changes after spin-offs and equity carve-outs. Moreover, Ramnath (2002) sh
that analysts revise their earnings forecasts in response to the earnings announcement
other firms in the same industry. Together, these results suggest that an analyst's com
ative advantage lies in interpreting specific industry or market sector trends and impro
intra-industry information transfers. Unlike institutions and insiders, analysts convey their
private information through firm-specific earnings forecasts and stock recommendati
Moreover, analysts can improve the efficiency of prices not just through their firm-specifi
forecasts, but also by identifying the common industry component of each firm's n
event, and disseminating that information into the price formation process of all cove
firms. Because analyst forecasts and subsequent revisions induce price-relevant trade
(Givoly and Lakonishok 1979; Lys and Sohn 1990; Park and Stice 2000), their forecast
activities should cause prices to reflect this additional industry- and market-level infor
tion, resulting in greater stock return synchronicity.
We find that stock return synchronicity is positively associated with analyst activ
consistent with analysts increasing the relative amount of market- and industry-level infor-
mation reflected in firm-level security prices (i.e., the net effect of their activity is to imp
the incorporation of industry-level information into prices). In effect, analyst activity
as a conduit through which intra-industry transfers of information occur, leading to p
that exhibit greater co-movement. Conversely, we find that stock return synchronici
negatively related to greater levels of insider trading (i.e., the net contribution of t
trading activities is to increase the relative amount of firm-specific information influencing
prices). Finally, although the relation between changes in institutional holdings and s
chronicity is unclear, the level of institutional holdings displays a relation with synchronicit
similar to analysts, suggesting that the presence of significant institutional ownership
facilitates intra-industry information transfers. Together, our results are consistent with al
three parties influencing the in

relevant information conveye
formational advantage and abi
We examine the extent to wh
next year's earnings innovation
of these informed trading act
of low stock return synchron
allows us to measure whether th
the timing of the incorporation
prices. If stock return synchr
trading activities should not dif
ings components into price. C
synchronicity, insider and ins
of the firm-specific compone
appears to accelerate both indu
Section II provides backgroun
the research design and variab
Section IV presents extensio
concludes.
II. RESEARCH DESIGN, VARIABLE DEFINITIONS, AND DATA

Background on Stock Return Synchronicity
King (1966) documents that stock prices covary with both market and industry returns,
consistent with the notion that individual firms are influenced by a common set of economic
fundamentals. Building on this intuition, Ball and Brown (1967) document that a significant
portion of a firm's annual earnings innovation can be explained by common market- and
industry-level earnings news. The amount of earnings news attributable to these common
components is similar, in magnitude, to the fraction of stock returns that are explainable
by common market and industry movements. Thus, variation in earnings is partially attrib-
utable to variation in industry- and economy-wide earnings factors. Moreover, as discussed
in Cyert (1967) and Williams (1967), the residual component of earnings (not explained
by industry or market earnings) is likely to be a product of internal factors and events
unique to the firm.
Consistent with these arguments, Roll (1988) notes the weak association between in-
dividual firms' stock returns and market and industry stock price movements, and suggests
that this weak association (i.e., low stock return synchronicity) is the result of firm-specific
information being impounded into individual stock prices. Specifically, ceteris paribus, the
ability of industry and market returns to explain variation in firm-level returns declines as
relatively more firm-specific information is incorporated into the firm's stock price.
Several recent papers provide empirical support for Roll's (1988) firm-specific infor-
mation (relative to market and industry information) interpretation of low stock return
synchronicity. Morck et al. (2000) examine cross-country differences in stock return syn-
chronicity and find a negative relation between synchronicity and government protection
of property rights. This negative relation is consistent with Roll's (1988) explanation, be-
cause a low respect for property rights is likely to impede firm-specific informed trading
activities. Building on Morck et al.'s (2000) findings, Wurgler (2000) tests whether countries
with stock markets possessing more informed prices allocate resources more efficiently.
Consistent with informed prices aiding the flow of capital across sectors, Wurgler (2000)
documents a negative relation between the elasticity of industry investments and stock
return synchronicity. Similarly, Durnev et al. (2004) show that firm-specific return vari
in the U.S. is associated with efficient capital allocation (at the firm level). Be
stronger flow of firm-specific information should allow for greater monitoring and red
information asymmetry between insiders and outsiders, the observed relations betw
synchronicity and efficient capital allocation decisions indirectly support the interp
that synchronicity reflects the flow of firm-specific information. DeFond and Hun
show that the association between lagged stock returns (lagged earnings) and subs
CEO turnover is stronger in countries with low (high) stock return synchronicity, consis
with investors using external, observable stock prices for governance purposes when
reliably reflect firm-specific performance. Together, these studies use stock return sync
nicity as a proxy for informed prices, and document market behavior that jointly v
their interpretation of synchronicity.
Finally, using a sample of U.S. firms, Durnev et al. (2003) document that firm
synchronicity measures are negatively associated with how well prices lead earnings
izations. Using Collins et al. (1994) incremental R2 metric of stock price informativ
Durnev et al. (2003) find that the extent to which prices reflect a greater level of c
and future earnings information is positively related to the amount of firm-specific
mation impounded in price (i.e., low synchronicity).
By construction, stock return synchronicity measures the ability of industry and ma
returns to explain firm-level returns. The residual component of returns represents
specific information or idiosyncratic noise. Existing evidence suggests that stock
synchronicity is negatively related to the relative amount of firm-specific information i
encing prices. Given this evidence, stock return synchronicity is a reasonable bench
for measuring the relative amount of firm-specific versus market-level and industr
information influencing prices. However, this interpretation remains subjective. Th
paper is effectively a joint test of (1) the firm-specific information interpretation o
return synchronicity, and (2) the type of information contributed by the trading and tr
generating activities of insiders, institutions, and analysts.
Measurement of Stock Return Synchronicity

Each calendar year, we estimate firm-specific measures of return synchronicity
the methodology outlined in Durnev et al. (2003). Specifically, for each firm-year
vation, we regress weekly returns on the current and prior week's value-weighted
return (MARETi,) and the current and prior week's value-weighted two-digit SIC in
return, or:
RETi,t = x + IMARET,,,_1 + 32MARETi,t + P3INDRETi,t-_

+ r4INDRETi,t + Ei,t (1)
The industry return (INDRETi,,) for a specific week t is created using all firms with the
same two-digit SIC code, with firm i's weekly return omitted. INDRETi,, is the value-
weighted average of these firms' week t returns. We include lag return metrics since the
presence of informed parties can impact the timing of the market and industry information's
incorporation into prices. We estimate this regression for each firm-year with a minimum
of 45 weekly observations, where a weekly return is defined as the compounded return
over five consecutive trading days. All stock return data is gathered through the Center for
Research in Security Prices (CRSP). Following the definition in Morck et al. (2000), we
define synchronicity as:
SYNCHi,,
(IR2 R2 = log(1 - R2 (2)
where R2 is the coefficient of determination from the estimation of Equation (1). The log
transformation of R2 creates an unbounded continuous variable out of a variable originally
bounded by 0 and 1, yielding a dependent variable with a more normal distribution. SYNCH
is measured for each firm-year in the sample. By construction, high values of SYNCH
indicate firms whose stock returns are closely tied to (i.e., vary strongly with) market and
industry returns, and are assumed to reflect relatively less firm-specific information.
Measurement of Informed Parties' Information Dissemination Activities and Their

Predicted Relations with Stock Return Synchronicity
Insiders can communicate their private information to market participants through their
trading behavior. We measure this information flow using net insider trades during the
calendar year (TRADEi,,), where TRADE is the absolute value of the difference between the
sum of total shares purchased and total shares sold by insiders during the calendar year,
scaled by total trading volume during the year. This metric assumes that the net direction
of insider trades is informative and improves the efficiency of a firm's stock price. We
gather data on insider transactions through Thomson Financial's Thomson/First Call Insid-
ers Data Feed database.
Institutions can also communicate their private information through their tradi
havior. We measure the intensity of institutional investor activity by the net cha
institutional holdings (AINSTi,,) during the calendar year, scaled by total annual tr
volume. Data on share ownership was obtained through the CDA/Spectrum databas
CDA/Spectrum does not report institutional holdings for firm i in year t, we assum
the fraction of shares held and traded by institutions is zero.'
Finally, analysts can disseminate their private information through their earnings
casts, revisions, and stock recommendations. We measure the intensity of analyst ac
as the number of one-year-ahead earnings forecasts issued and revised for the firm
a given fiscal year. We gather data on the number of analysts issuing forecasts and
quent revisions (NREVi,,) through the I/B/E/S detail tape. If I/B/E/S does not rep
analyst forecast for firm i in year t, we assume that the number of earnings forecasts is
and revised for that firm-year is zero.2
III. EMPIRICAL RESULTS

Descriptive Statistics
Table 1 presents descriptive statistics about the firm-year observations incl
sample. In general, the firms display considerable cross-sectional variation in
MVE of $1.430 billion; median MVE of $108 million) and financial perfor
and median ROA of -0.019 and 0.029, respectively). In terms of these inform
and trade-inducing activities, several facts are apparent. First, a substantial p
firm-year observations do not have analyst forecasts, institutional ownersh
1 We implicitly assume that the other side of net transactions for both insider and institutional tr
taking investor without private information.
2 The specific channels of communication just described are not the only methods of disseminat
to the markets. For example, institutional investors can issue stock recommendations on their fir
agers can convey private information through voluntary disclosure mechanisms.
TABLE 1
Descriptive Statistics
Descriptive statistics for the sample of firm-year observations available between fiscal yea
and 2000. All variables are as defined in the Appendix. n = 74,571.
5th 25th 75th 95th
Mean Std. Dev. Pctl. Pctl. Median Pctl. Pctl.
Stock Return Synchronicity

R2 0.193 0.153 0.029 0.080 0.148 0.261 0.524
SYNCH -1.742 1.088 -3.519 -2.443 -1.754 -1.040 0.096
Measures of Informed Trade
NREV 8.100 17.106 0.000 0.000 0.000 8.000 47.000
log(NREV) 0.985 1.428 0.000 0.000 0.000 2.197 3.871
AINST (%) 9.510 14.738 0.000 0.000 3.810 12.367 39.815
log(AINST) 0.083 0.117 0.000 0.000 0.037 0.116 0.335
INST (%) 23.491 25.640 0.000 0.000 14.981 40.230 75.459
log(INST) 0.178 0.202 0.000 0.000 0.094 0.335 0.570
TRADE (%) 0.723 3.289 0.000 0.000 0.026 0.370 2.991
log(TRADE) 0.007 0.027 0.000 0.000 0.0003 0.004 0.029
Firm and Industry Characteristics
MVE 1,430.4 8,712.7 5.320 28.075 108.418 525.415 5,035.1
log(MVE) 4.836 2.092 1.667 3.321 4.660 6.233 8.521
DIVERS 0.874 0.221 0.373 0.794 1.000 1.000 1.000
FUNDCORR -2.499 2.350 -6.873 -3.682 -2.130 -0.948 0.581
HERF 0.086 0.088 0.018 0.039 0.061 0.094 0.254
log(HERF) 0.080 0.074 0.018 0.038 0.059 0.090 0.227
STDROA 0.030 0.134 0.0008 0.005 0.012 0.031 0.112
NIND 258.25 226.12 22.460 73.400 195.160 399.780 759.100
log(NIND) 5.087 1.100 3.129 4.312 5.286 5.998 6.669
ROA -0.019 0.291 -0.425 -0.014 0.029 0.072 0.162
abs(AROA) 0.081 0.209 0.0008 0.007 0.026 0.079 0.340
MB 4.260 75.703 0.055 1.109 1.736 3.022 9.062
SHRTURN 0.962 1.268 0.117 0.325 0.609 1.126 2.991
log(SHRTURN) -0.514 0.988 -2.147 -1.124 -0.497 0.119 1.095
RETCORR 0.735 0.185 0.352 0.660 0.780 0.870 0.922
trading. Given this large proportion of "zero" ob

without these observations, noting any differen
erable cross-sectional variation in analyst forecas
ity, and insider trading. Third, these informed p
log transformations of these variables.
Consistent with the weak associations documen
median R2s from the estimations of Equation (
ever, despite the low average and median levels
metric) display considerable cross-sectional varia
of the sample had R 2s in excess of 26.1 percent
The Accounting Review,
less than 8.0 percent. Given that t

tional differences documented at t
ficiency of the judicial system, ro
of observed differences in synch
economics underlying each firm a
Table 2 presents the matrix of corr
firm-specific
parent. characteristics,
First, analyst and stock
forecast revisions return
(NREV) and synchronicity. Several ownership
changes in institutional key relations are ap-.
(AINST) display a positive correlation. Second, the Pearson correlations between net insider
trades (TRADE) and NREV (AINST) are negative (positive), while both Spearman correla-
tions are significantly positive. After removing firms with no analyst coverage and insti-
tutional ownership, we find a strong negative relation between TRADE and NREV while
TRADE continues to have a small positive correlation with AINST (not tabulated). Third,
both analyst forecast activity and changes in institutional ownership display a significant
positive association with stock return synchronicity, while insider trading has a negative
(positive) Pearson (Spearman) correlation with stock return synchronicity. When firms with
no analyst coverage or institutional ownership are removed, the positive correlations be-
tween SYNCH and both NREV and AMNST become stronger, while the relation between
SYNCH and TRADE becomes significantly negative (Spearman correlation of -0.23). The
correlation pattern across informed trader types is consistent with each party's exposure to
internal, firm-specific information.3
Impact of Informed Market Participants on the Relative Amount of Market-Level,

Industry-Level, and Firm-Specific Information in Prices
To test whether analyst forecasting activity, changes in institutional ownership, and
insider trading activity influence the relative flow of firm-specific, industry-level, and
market-level information into prices, we annually estimate the following cross-sectional
model:
SYNCH,,, = 0o0 + E atIlNDj,

j=l
+ p31REG,, + 2DIVERS,, + 33FUNDCORRi,,
+ 34log(HERF,,,) + PfSTDROA,t, + 36log(NINDi,t)

+ 37log(MVE,,,t) + 38log(NREVi,,) + P39log(AINSTi,t)
+ 3 Polog(TRADEi,,) + ei,t (3)
Stock return synchronicity is principally affected by the unde
firm and its industry. To control for industry-level fixed effects, we
digit SIC code industry indicator variables (INDj).4 To control for
differences, we include variables measuring whether the firm op
dustry (REG), the diversification of the firm (DIVERS), the correlation
with industry-level earnings (FUNDCORR), the industry-lev
Herfindahl index) of the firm's primary business (HERF), the volatility
stream (STDROA), the number of firms in the industry (NIND), an
These relations should be viewed cautiously because they do not control for differe
4 Fixed effects associated with SIC code industries 1 through 8 are captured usin
where j reflects one-digit SIC codes 1 to 8. Fixed effects associated with industr
intercept.
TABLE 2
Correlation Matrix
SYNCH REG DIVERS FUNDCORR log(HERF) STDROA log(NIND) log(MVE) log(N

SYNCH 1.000 0.069 -0.151 0.056 -0.013 -0.041 -0.060 0.513 0
(0.000) (0.000) (0.000) (0.001) (0.0) (
REG 0.063 1.000 0.062 -0.028 -0.176 -0.066 0.279 0.125 -0
(0.000) (0.000) (0.0) (0.00 (0.0) (0.
DIVERS -0.150 0.059 1.000 -0.034 -0.015 0.131 0.137 -0.243 -0
(0.000) (o.ooo) - (.0.0) (.0(.00) (0.0.00 (0.000) (0...0) (.000
FUNDCORR 0.062 -0.033 0.038 1.000 0.044 0.015 -0.061 0.034 0
(0.000) () (0.000) o.ooo) (0.00) (0.000) (0.000.000) (0.000.000) (0.0
log(HERF) -0.032 -0.391 -0.031 -0.007 1.000 -0.001 -0.477 -0.130
(0.000) (0.000) (0.000) (0.041) (0.973) (0.000) (0.000) (0.
STDROA -0.187 -0.416 0.047 -0.001 -0.004 1.000 0.036 -0.108 -0
(0.000) (0.000) (0.000) (0.859) (0.217) - (0.000) (0.000) (0.
log(NIND) -0.061 0.285 0.165 -0.069 -0.557 -0.032 1.000 0.006 -
(0.000) (0.000) (0.000) (0.000) (0.000) (0.000) - (0.110) (0.
h3
Ch
log(MVE) 0.505 0.137 -0.102 0.035 -0.007 -0.022 0.010 1.000 0
(0.000) (0.000) (0.000) (0.000) (0.068) (0.000) (0.005) - (0.
C3
O
log(NREV) 0.249 -0.041 -0.179 0.078 0.044 -0.041 -0.009 0.306
X
;S (0.000) (0.000) (0.000) (0.000) (0.000) (0.000) (0.014) (0.00
~t;
;S log(AINST) 0.134 0.063 -0.014 0.003 0.005 -0.004 0.058 0.003
C~q
3er
(0.000) (0.000) (0.000) (0.42) (0.15) (0.33) (0.000) (0.39
(h
1 log(TRADE) 0.047 -0.007 0.006 -0.003 0.008 -0.002 0.088 -0.014
ca
(0.000) (0.074) (0.103) (0.445) (0.026) (0.602) (0.000) (0.00
O
c, Correlation matrices for full sample of firm-year observations. Spearman (P
B p-values are presented in parentheses. All variables are as defined in the Ap
ch
y
o
o
controlling for these attribut

(NREV), changes in institution
stock return synchronicity.
All firms in a regulated indust
As such, their equity values sh
and economic conditions. The
financial institutions or utilit
0 otherwise. We expect a posi
The more diverse the firm's
idated profitability will track th
diversified firms may be less se
the firm is by looking at the co
(DIVERS) using a firm-specifi
business-segment-level reve
SYNCH.
The more correlated the firm's profitability is with the underlying industry's perform-
ance, the more synchronized the firm's stock price should be with industry returns. O
measure of this correlation in fundamentals, FUNDCORR, is calculated in a manner an
ogous to SYNCH. In lieu of stock returns, we estimate the ability of a value-weigh
industry ROA to explain firm-level ROA realizations. Using quarterly data, we estima
ROA with the preceding three years of data, giving us a maximum of 12 observations p
firm-specific regression. We expect FUNDCORR to be positively related to SYNCH.
The structure of the industry should influence the amount of synchronicity observed in
returns. The more concentrated an industry is, the more likely it is that the firms' perform
ances are inter-dependent, and news about one firm is likely to be perceived as value-
relevant for the remaining firms (e.g., an oligopoly versus a perfectly competitive mark
Similarly, an obvious market leader could act as a leading indicator for smaller firms
such a setting, all firm returns are likely to be synchronized to the leader's returns due
the intra-industry transfer of information. We measure industry concentration (HERF
the two-digit SIC code industry's Herfindahl index for the year. In both cases, we exp
HERF to be positively related to SYNCH.
As the volatility of the firm's profitability increases, it is less likely that firm-lev
performance will be correlated with overall industry or market trends. We measure earnings
volatility as the standard deviation of quarterly return on assets (STDROA), measured o
three years including and preceding year t. Each quarter's return on assets is measured
income before extraordinary items scaled by average total assets. We expect STDROA
be negatively related to SYNCH.
Finally, we include firm size to control for omitted firm-specific factors. For examp
firm size is positively associated with various dimensions of the firm's information en
ronment, including media exposure and overall level of investor interest. Differences
firms' information environments could influence stock return synchronicity. Alternativ
large firms could represent leading market indicators. To the extent that large firms re
or signal macro-economic trends, their price behavior is likely to induce similar over
market movements, resulting in heightened stock return synchronicity. We measure f
size as the natural logarithm of the market value of equity (MVE). We make no predi
of the sign of the relation between MVE and SYNCH.S
Table 3 presents the average coefficients from 17 annual OLS estimations of Equa
(3). These average coefficients are tested against the null of zero, using standard er
derived from the empirical distribution of annual coefficients. The coefficients on t
dustry indicator variables (INDj) are not tabulated for parsimony. To control for skew
1 DI-Di . 3
Relations between Stock Return Synchronicity and Analyst Forecast

Institutional Ownership, and Insider Trading Activity
This table presents average coefficients from 17 annual estimations of t

8
SYNCHi,, = t + I ol/JND',,
j=1 + PIREG,,, + 2DIVERSi,, + 33FUNDCORR,,, + 34log(HERFi,,)
+ P35STDROA,,, + P61og(NIND,t) + 3710og(MVE,,) + 38log(NREV,,,)

+ 39log(AINSTi,,t) + 1olog(TRADEi,t) + i,t
Average Coefficients from Annual Estimations
Predict Est. (1) Est. (2) Est. (3) Est. (4) Est. (5)
Intercept -3.256 -3.229 -3.234 -3.247 -3.197
(-25.68) (-25.58) (-26.20) (-25.77) (-26.17)
REG + 0.178 0.176 0.178 0.179 0.177
(2.95) (2.92) (2.94) (2.97) (2.93)
DIVERS + 0.070 0.074 0.069 0.070 0.074
(2.53) (2.69) (2.55) (2.55) (2.73)
FUNDCORR + 0.007 0.006 0.007 0.007 0.006
(3.96) (3.83) (4.03) (3.95) (3.87)
log(HERF) + 0.265 0.269 0.251 0.262 0.253
(2.52) (2.57) (2.43) (2.53) (2.49)
STDROA - -0.421 -0.395 -0.455 -0.431 -0.443
(-2.76) (-2.61) (-3.03) (-2.80) (-2.92)
log(NIND) ? 0.009 0.008 0.006 0.008 0.005
(1.35) (1.25) (1.06) (1.24) (0.84)
log(MVE) ? 0.290 0.277 0.292 0.289 0.278
(27.09) (27.95) (28.03) (26.99) (29.04)
log(NREV) + - 0.039 - - 0.040
(11.94) - - (11.59)
log(AINST) ? -0.265 -0.274
S- (-3.96) - (-4.32)
log(TRADE) - - - - -0.813 -0.756
-(-4.72) (-4.49)
Ave. Adj. R2 35.2% 35.4% 35.3% 35.2% 35.6%
See the appendix for variable definitions. Average coefficients fr

model for each informed trader proxy and 17 annual estimations
("joint estimation") are presented. t-statistics (in parentheses) are
empirical distribution of these annual coefficient estimates.
We also include the average number of firms in the industry

return as a control variable (see Durnev et al. 2003). NIND is
arising from differences in sample size used for estimation pur
The Accounting Review,
in the data, we take the loga

Appendix summarizes the de
As expected, diversified fir
have less synchronous stock
with their industry's perform
affiliation, firms operating
more synchronous prices. Fin
with market and industry re
of economy-wide and indust
and consistent with prior lit
nicity is estimated properly.
Focusing on the activities o
synchronicity is significantl
mation (4)) and institutional
gest that the net effect of i
flow of firm-specific inform
mation advantage. In contra
association with the level of
gests that a greater portion o
returns as the level of analy
uting industry- or market-le
activities improve intra-ind
movement. Finally, these ind
in the same annual estimatio
Relation between Informed

Synchronicity: Simultaneo
Analyst activities, instituti
economic characteristics of t
its financial performance an
the firms they cover based o
market leaders or those with s
insiders may be more inclin
idiosyncratic risk (i.e., low st
between the activities of these
following three systems of s
the observed relations:
Analyst Revisions:
8
SYNCH,,, = oto + j=l1

C oI/jNDJ,t + 3,REGi,, + 32DIVERSi,, + 33FUNDCORRi,,
+ 34log(HERF,,,) + 35STDROAi,, + 36log(NIND,,,)
+ P37log(MVE,,,t) + P8log(NREVi,,) + Ei,t
8
log(NREV,,,) = ?o + o.INDJ,t
j=l
+ I1REG,,, + 2STDROAi,, + 31log(MVEi,t)
+ P4ROAi,t + P351log(SHRTURNit) + I6SYNCHi,t + e

Institutional Trading:
SYNCH,,, = j=l1
o + > ojaNDJ,t + I REGi,, + 32DIVERS,, + P3FUNDC
+ P4log(HERFi,) + P5STDROA,,t + 36log(NINDi,)

+ 3710og(MVE,,,) + P38log(AINSTi,t) + -i,t
8
log(AINSTi,,) = ato + X aEIND,,, + 1REG,,, + P321og(MVEi,,)

j=l1
+ 33log(SHRTURN,,,) + 34abs(AROAi,t+1)
+ 35log(MB,,t) + P6abs(RETi,t-1) + 37SYNCHi,t + Ei,t (5)
Insider Trading:
SYNCH,,, = ao0 + a oiNDJ,,

j=l1
+ I1REGi,, + 32DIVERS,, + 33FUNDCORRi,,
+ 3410og(HERF,,t) + p5STDROAi,, + 361og(NINDi,,)

+ 37log(MVE,,,t) + P,8log(TRADEi,t) + Ei,t
8
log(TRADE,,,) = o + a olND',, +j=l1

REG,,, + P2log(MVEi,,)
+ 33log(SHRTURNi,,) + 34abs(AROAi,t+1)
+ 35log(MBi,,) + P6abs(RETi,t-1) + 37SYNCHi,t + Ei,, (6)
Each system individually models the simultaneous relation between the activity of one
informed party and stock return synchronicity. Due to the difficulty associated with iden-
tifying unique instruments for each informed trading activity, these models are not estimated
as a complete system.
Wherever possible, the variables chosen for the informed-party models are identified
from existing research (e.g., Lang and Lundholm 1996; Stickel 1998; Rozeff and Zaman
1998). However, research on institutional trading volume and insider trading volume (i.e.,
unsigned trades) is scarce, so we incorporate variables that influence trading volume or
signed insider transactions and institutional transactions. In these models, ROA is the current
year's return on assets, defined as net income before extraordinary items scaled by average
total assets; SHRTURN is the current year's trading volume scaled by shares outstanding;
abs(AROA) is the absolute change in the current year's return on assets; MB is the firm's
market-to-book ratio; and abs(RET) is the firm's absolute market-adjusted return for the
preceding year. All other variables are as previously defined. These systems are estimated
annually using two-stage least squares. Table 4 reports average coefficients and time-series
t-statistics from 17 annual estimations.
Consistent with prior research on analyst following, NREV is positively related to firm
size, share turnover, and profitability, and negatively related to the variability of earnings.
In terms of insider and institutional trading, both of these transactions are positively related
to the firm's market-to-book ratio and inversely related to the magnitude of contempora-
neous earnings change (AROA) and share turnover. Insider trades display a marginally
TABLE 4
Simultaneous Estimations of the Relations between Stock Return Synchronicity and A
Forecasting Activity, Changes in Institutional Ownership, and Insider Trading
This table presents average coefficients from 17 annual estimations of the following set o
8
SYNCH,,, = ?o + j=1
- ojlNDJ, + 1P3REG,, + 32DIVERSi,, + I3FUNDCORRi,, + Plog(HERF,,)
+ PsSTDROA,,, + ,610g(NINDi,) + P,7log(MVE,,,) + 81log(NREV,,,) + -i,t
8
log(NREV,,) = ao + o/NDJ,,j=1
+ IP3REG,, + --2STDROAit, + 3log(MVEit) + T 4ROAi,
+ 51og(SHRTURN,,,) + 6SYNCHi,t + Fi,t
8
SYNCHi,t = ao + oajINDj,,j= ?+
1 PREGi,, + 32DIVERS,, + 03FUNDCORRi,,
+ P341g(HERF,,) + PsSTDROAi,, + 610og(NINDi,,) + 71,og(MVEi,)

+ P810og(AINST,,) + -,,
8
log(AINSTi,,) = o + o/jlNDO,j=1+ IREGi,, + 210og(MVE,,,) + p3log(SHRTURN,,)
+ P4abs(AROA,,,t+) + pslog(MB,,,) + I6abs(RETi,,-1) + P7SYNCH,t + Ei,t

8
SYNCHi, = A0 + Z a/IND,
j=1 + IREGi,t + +2DIVERSi,t + W3FUNDCORRi,t + 410g(HERFi,t)
+ P5STDROAi,t
8
+ P610g(NINDi,) + 37log(MVEi,t) + 810og(TRADEi,,) + it
log(TRADEi,) = ao + a/otJND, j=I

+ PIREGi,, + 2log(MVEi,t) + f3log(SHRTURN,1t)+
P4abs(AROA,t+ 1) + P51log(MBi,,) + 36abs(RET,1t-1) + 7SYNCHi,t + i,t

Dependent Analyst Revisions Institutional Trading Insider Trad
Variable SYNCH log(NREV) SYNCH log(AINST) SYNCH log(TRADE)
Intercept -2.672 0.470 -2.755 0.108 -2.608 -0.013
(-22.41) (0.95) (-13.13) (2.00) (-12.86) (-0.99)
REG 0.148 -0.061 0.177 -0.003 0.286 0.003
(4.02) (-1.46) (4.12) (-0.46) (3.96) (1.93)
DIVERS 0.147 0.078 - 0.100
(3.26) (2.88) - (13.62)
FUNDCORR 0.000 0.005 0.004
(0.02) - (2.71) (1.77)
log(HERF) 0.325 - 0.075 - 0.244
(2.68) - (0.66) (1.71)
STDROA -0.039 -0.665 -1.399 -0.969
(-0.19) (-4.79) (-4.06) - (-3.46)
log(NIND) -0.006 - -0.030 - -0.028
(-0.73) (-2.51) (-3.36)
log(MVE) 0.035 0.229 0.313 -0.000 0.234 0.0004
(1.73) (4.84) (14.64) (-0.04) (12.76) (0.31)
ROA - 0.177 - - - -
- (7.87) - -
(continued on ne
TABLE 4 (continued)
Dependent Analyst Revisions Institutional Trading Insider Trading

Variable SYNCH log(NREV) SYNCH log(AINST) SYNCH log(TRADE)
log(SHRTURN) - 0.120 - -0.032 - -0.002
(4.50) - (-9.09) (-3.34)
abs(AROA) - - -0.039 - -0.004 -
- - - (-4.78) - (-3.28)
log(MB) - - - 0.004 - 0.001
-(2.02) (2.69)
abs(RET) - - - -0.003 - 0.001
- - - (-1.30) - (1.93)
log(NREV) 0.784 - - - - -
(15.93)
log(AINST) - - -4.74
(-9.18)
log(TRADE) - - - - -46.343
-(-9.77)
SYNCH 0.341 0.037 - -0.005
(2.11) - (2.00) - (-1.16)
Avg. Adj. R2s:
First Stage 36.7% 20.4% 34.4% 9.8% 36.6% 1.7%
Avg. Adj. R2s:
Second Stage 21.0% 20.5% 9.6% 27.8% 1.3% 16.5%
See the Appendix for variable definitions.

t-statistics (in parentheses) are based on standard errors derived from the
coefficient estimates.
significant association with the magnitude of the preceding year's stock return. In terms of
explanatory power, our first-stage NREV models have an average R2 of 20.4 percent; how-
ever, our instruments do a relatively poorer job at explaining changes in institutional hold-
ings and net insider trades, where the average first stage R2s are 9.8 percent and 1.7 percent,
respectively.
The existing literature does not provide conclusive evidence regarding whether a firm's
information environment induces greater analyst following or whether analyst activity leads
to improvement in a firm's information environment.6 Our specification is designed to con-
trol for the potential simultaneity that can exist between these two constructs, yet causality
still should be inferred cautiously. Based on the annual estimations of the NREV and AINST
models, our evidence suggests that analysts and institutions are more active in firms whose
stock prices are more synchronous with industry and market returns. In contrast, we are
unable to document whether insiders prefer trading in firms whose prices contain relatively
more or less firm-specific information.
After controlling for the effects of simultaneity, our synchronicity models confirm the
primary OLS results: stock return synchronicity is positively associated with analyst activity,
and negatively associated with institutional and insider trading. Together, the evidence in
Tables 3 and 4 suggests that analyst activities help stock prices synchronize better with
industry-level and market-level movements. This positive relation is particularly compelling
6 For example, Lang and Lundholm (1996) find a positive relation between analyst following and AIMR scores,
while Healy et al. (1999) find that improved disclosure attracts analysts.
since trading by institutions an

return synchronicity, consiste
access to internal, firm-specific
Robustness Tests
Elimination of Observations without Informed Trading Activity
A potential concern is that our estimations are being unduly influenced by the prese
of zero observations for NREV, AINST, and TRADE. Estimations excluding zero obser
tions reveal several important results (not tabulated). First, the significant individual r
tions between synchronicity and the activities of analysts, institutions, and insiders d
mented in Table 3 are also found in a non-zero subsample of observations. However, t
average annual coefficients on log(NREV), log(AINST), and log(TRADE) are slightly smal
in magnitude than those reported in Table 3. Second, the coefficient on TRADE becom
insignificantly negative in the joint estimation. Finally, after controlling for simultane
the relations between synchronicity and the activities of the three parties are consistent wit
those reported in Table 4. However, synchronicity no longer has explanatory power
determinant of analyst following and institutional trading.
Measurement of Industry and Market Returns and Additional Control Variables

To measure stock return synchronicity, we classify firms by their two-digit SIC c
affiliation. For robustness, we reestimate our metrics and models using three-digit SIC c
and Fama and French (1997) industry classifications and find similar results. Moreover,
results are robust to the use of equal-weighted market and industry returns in lieu of value
weighted market and industry returns to estimate stock return synchronicity. We retain tw
digit SIC code industries and value-weighted returns to be consistent with Durnev et
(2003).
For firms that are thinly traded, the measurement error in daily returns arising from
bid-ask bounce could result in low stock return synchronicity. Because insiders are m
likely to engage in informed trade in thinly followed firms and because analysts
less likely to follow these firms, our results could be an artifact of liquidity. Moreo
because our insider and institutional trade variables are scaled by annual trading volu
it is possible that our trading variables are correlated with firm size and/or liquidity.
control for the direct effects of liquidity, we reestimate Equations (3) through (6) af
adding the log of the firm's share turnover as another explanatory variable for stock return
synchronicity. The inclusion of share turnover in these estimations yields a significant
itive relation with synchronicity, but it does not alter the sign or significance of the observ
relations between synchronicity and our measures of analyst activities or insider trad
However, inclusion of share turnover eliminates the significant negative relation betw
synchronicity and changes in institutional holdings in both our OLS and simultaneou
specifications.
Measurement of Informed Insider Transactions: Net Trades versus Total Trades

or Purchases
Our measure of insider transactions is based on net insider trades. However, many s
transactions result from liquidity demands and do not reflect managers' private information
Furthermore, sales transactions may be mechanically associated with synchronicity if
siders sell their holdings when a firm's idiosyncratic risk increases (i.e., insiders divers
their portfolios in reaction to a decrease in stock return synchronicity). As a result, TR
is a noisy proxy for the firm-specific information possessed by insiders and dissemi
through their trades. By contrast, an open-market purchase is likely to be an inform
driven transaction. If greater insider transactions increase the flow of firm-specific
mation into prices, then the observed synchronicity relations should be magnified u
purchase-based insider trading metric. We measure insider buy transactions (PURCH
total shares purchased by insiders during the calendar year, scaled by total trading v
during the year. We re-estimate our synchronicity models using PURCH in lieu of T
and find that this specification yields a stronger relation between insider trades and the f
of firm-specific information (results not tabulated).7
Alternatively, if both insider sales and insider purchases have information conten
the time of the transaction, the use of net insider trades will understate the amou
information being conveyed by insiders throughout the year. Given this, we measure
insider transactions (ALLTRADE) as the sum of total shares purchased plus total sha
sold by insiders during the calendar year, scaled by total trading volume during the
We re-estimate our synchronicity models using ALLTRADE in lieu of TRADE, and find
this specification also yields a stronger relation between insider trades and the flow of fir
specific information into prices (results not tabulated). Together, the use of insider purcha
and total trades confirms and strengthens our interpretation that the net effect of inform
insider transactions is to increase the relative amount of firm-specific information in
in the stock price formation process. We retain the use of net trades (i.e., TRADE) in
models because this metric is more prevalent in the insider trading literature.
Relations Conditional on Firm Size

Prior research shows that the informativeness of insider trades decreases with firm size
(Lakonishok and Lee 2001). Similarly, both analyst coverage and institutional ownership
are positively correlated with firm size (Bhushan 1989; O'Brien and Bhushan 1990). To
better understand the relations between synchronicity and these informed parties' activities,
and to mitigate concerns that the preceding results are simply a consequence of firm size,
we re-examine these relations conditional on firm size. Specifically, we employ two com-
plementary research designs. First, we stratify our sample into size quartiles based on annual
rankings of beginning-of-year market capitalizations, and re-estimate Equation (3) annually
by quartile. Second, we re-estimate Model (3) annually after including an interaction term
between each informed party and a mean-adjusted measure of firm size.8
Average coefficients from annual estimations across size quartiles yield two insights.
First, the relation between stock return synchronicity and analyst revisions is significantly
positive across all size partitions. Second, the relations between stock return synchronicity
and insider trading, and between synchronicity and changes in institutional holdings, are
negative across all size partitions. However, the insider trading relation is only significant
in the top two size quartiles, while the institutional relation is insignificant in the smallest
size quartile.9 Finally, these estimations do not reveal any monotonic trends in the relations
across quartiles.
7 Alternatively, the use of a sales-based insider trading metric in lieu of TRADE yields a weaker (yet still signif-
icant) relation between insider trades and the flow of firm specific information (results not tabulated).
8 Specifically, we subtract the annual mean of firm size from each observation's firm size variable and interact
this adjusted measure with the informed party variable. This allows us to interpret the coefficient on the informed
party variable as the effect of that variable for a firm of average size (Wooldridge 2003).
9 If insider trading is measured using total trades in lieu of net trades, the negative relation between synchronicity
and insider trading is significant across all four size partitions.
Interacting our informed p

yields generally similar infer
tween synchronicity and ana
uated at the mean-sized firm
size, we find that the coefficie
size is significantly negative
contrast, interaction terms for
ative, consistent with the ob
(results not tabulated).
Measurement of Financial In
Tables 3 and 4 show that sto
of total trading volume attr
year. However, as reported in
ditional Control Variables" se
over as an additional control
the impact of trading volum
for this transaction-based va
in institutional holdings scale
mations, this variable has a s
Given these inconsistencies,
is unclear.
In general, the type of information that financial institutions contribute to the price
formation process is expected to be a function of their ownership stake, investment styles,
and trade size (Hartzell and Starks 2003; Ali et al. 2004). For example, institutions taking
larger positions have the ability to gain access to firm-level information and monitor man-
agement. Alternatively, long-term dedicated institutions tend to follow indexing or section-
based strategies (Bushee 1998), making them likely to possess an industry- and market-
level information advantage similar to that of analysts. Thus, the presence of significant
institutional ownership could lead to improved intra-industry information transfers, resulting
in more synchronous price movements among the firms in the industry. Given this, changes
in holdings are likely to convey different information depending on the pre-trade ownership
stake and investment style.
Given these conflicting scenarios, the relation between changes in institutional holdings
and synchronicity needs to be examined conditional on the level of holdings. Although
changes in holdings scaled by total volume is a logical measure of the (relative) amount
of informed trade generated by institutions during the year, prior studies examining the
informational consequences of institutions focus on the level of institutional holdings as
their proxy for information activities (e.g., Jiambalvo et al. 2002). To further explore the
information effects of institutions, we measure the aggregate percentage of shares outstand-
ing held by institutions (INST) at the beginning of the fiscal year. Table 5 presents esti-
mations of our synchronicity regressions after including the level of institutional ownership
as both an additional explanatory variable and as a conditioning variable. The first column
presents our basic results for changes in institutional shareholdings from Table 3. The
remaining columns present estimations that incorporate INST in several different empirical
configurations. Estimation (2) reveals that stock return synchronicity has a significant pos-
itive relation with the level of institutional holdings (INST). This relation is similar to the
TABLE 5
Relations between Stock Return Synchronicity and Institutional Ownership: Role o
Institutional Holdings versus Change in Holdings
This panel presents average coefficients from 17 annual estimations of the following mod
8
SYNCH,,t = 0,o + , oLJIND,,

j=1
+ PrREGi,, + 32DIVERSi,, + 33FUNDCORR,,, + 34log(HERF,,)
+ 3,STDROA,, + 061og(NIND,,,) + p37og(MVE),,, + Plog(AINSTi,,) + 391og(INSTi,,)

+ 3iolog(AINSTi,) * log(INSTi,,) + Ei,,

Estimation Est. (1) Est. (2) Est. (3) Est. (4)
Intercept -3.234 -3.255 -3.225 -3.225
(-26.20) (-26.11) (-26.48) (-26.46)
REG 0.178 0.201 0.205 0.206
(2.94) (3.51) (3.56) (3.61)
DIVERS 0.069 0.073 0.073 0.075
(2.55) (2.69) (2.72) (2.81)
FUNDCORR 0.007 0.007 0.007 0.007
(4.03) (4.25) (4.28) (4.29)
log(HERF) 0.251 0.262 0.247 0.247
(2.43) (2.48) (2.36) (2.36)
STDROA -0.455 -0.331 -0.382 -0.389
(-3.03) (-2.37) (-2.67) (-2.70)
log(NIND) 0.006 0.010 0.007 0.007
(1.06) (1.52) (1.17) (1.21)
log(MVE) 0.292 0.279 0.280 0.280
(28.03) (29.36) (30.56) (30.79)
log(AINST) -0.265 - -0.380 -0.502
(-3.96) - (-6.52) (-8.05)
log(INST) 0.303 0.356 0.313
(5.20) (5.99) (4.96)
log( AINST)*log(INST) 0.618
Avg. Adj. R2 35.3% 35.5%
-- (2.89)
35.7% 35.8%
t-statistics (in parentheses) are based on the standard errors derived fr
association observed between synchronicity and analyst activity, suggesting that significant
institutional ownership also facilitates intra-industry information transfers.'1
The remaining two columns document that institutional trades and the level of insti-
tutional ownership have incremental explanatory power for stock return synchronicity. In
terms of interactive effects, the informational impact of institutional trades varies by their
combined pre-trade ownership stake. Specifically, the main effect of AINST is negative,
while the coefficient on the interaction of AINST and INST is positive. For a firm with
1o Unlike observable analyst forecasts and revisions, the mechanisms by which large institutions reveal industry-
level information and influence prices (e.g., analyst comments and research reports) are not readily observable.
average institutional holdings

becomes less negative as the
interaction term is consisten
trenched within institutional
draw the attention of other i
holdings and interaction term
scaled by trading volume and sh
volume. In contrast, the unco
tutional trades remains fragil
IV. FURTHER EVIDENCE ON WHETHER ANALYSTS, INSTITUTIONS, AND

INSIDERS DIFFERENTIALLY INFLUENCE THE IMPOUNDING OF
INDUSTRY-LEVEL VERSUS FIRM-SPECIFIC INFORMATION INTO PRICES
Our interpretation of the results is predicated on the assumption that v
stock return synchronicity reflects differences in the relative amounts of firm-s
industry-level information influencing prices. Although existing research yields r
sistent with this interpretation, alternative explanations exist. One alternativ
for lower return synchronicity (at the firm level) is an increase in noise trad
leading to uninformative price movements. Our data support this interpretati
presence of analysts may simply reduce noise and inefficiency in the price fo
cess, leading to less firm-specific volatility. Second, insider trading may limi
mation gathering and processing activities of other parties (e.g., Fishman an
1992), resulting in firm-specific returns that are driven less by new informa
by noise trading.
To corroborate our interpretations about the types of information these t
contribute to the price formation process, we perform two additional sets of tests
test examines the incremental explanatory power of industry-level returns c
these three informed parties' activities. The second test examines whether t
parties differentially influence the timing of the incorporation of the firm-
specific components of earnings news into prices. Consistent results will help
our interpretation of the primary results, and validate the use of synchronicity a
of relative information-type influencing prices.
Relation between Informed Trading Activities and the Incremental Expl

Power of Industry-Level Returns to Explain Firm Returns
To the extent that analysts possess industry expertise and contribute indus
formation to the price formation process, the incremental explanatory power
level returns (relative to market-level returns alone) for explaining firm retu
positively related to the number of analyst revisions, ceteris paribus. Simil
coverage should facilitate intra-industry information transfers, leading to
movement between firm-level and industry-level returns. In contrast, inside
tional trading should contribute relatively less to the explanatory power of i
news.
" For completeness, we examine our relations conditional on the type of financial inst
investment advisors, investment companies, bank trusts, etc) using the classifications o
and Hartzell and Starks (2003). We find no significant differences in the relation be
institutional trading when the sample is partitioned by institution type.
To measure the incremental explanatory power of industry returns (over market retu
we create the variable R2DIFF, defined as the difference between the R2 of Equat
and the R2 from the following regression:
RETi,t = o + IMARETi,, + 2MARETi,t-1 + Ei,t

To shed light on the extent to which these informed traders influence the relati
portance of industry-level returns for explaining firm-level returns, we annually e
the following model:
R2DIFF,,, = ao + otjNDJ,, +j=l1fIREGi,, + p2DIVERS,, + 33FUNDCORRi,,
+ 34log(HERFi,t) + 35STDROA,,, + 36log(NINDi,t)

+ 37log(MVE,,,) + P8RETCORR,,, + 9log(NREV,,)
+ fiolog(AINSTi,t) + p,,log(TRADE,,) + Fi,t. (8)
Table 6 presents average coefficients from 17 annual estimations. t-statistics are based on
the empirically derived distribution of observed coefficients.
After controlling for firm-specific factors, as well as for the correlation between industry
and market returns (RETCORR), the incremental ability of industry-level returns to explain
firm-specific return variation increases in analyst revisions and decreases in changes in
institutional holdings and insider transactions. Intuitively, the results suggest that analysts
improve the firm's information environment by using their industry-level expertise to in-
terpret and predict firm-level performance in the context of industry-level information. Con-
versely, greater institutional activity and more insider trades imply that a (relatively) smaller
portion of a firm's stock return can be explained by industry-level information after con-
trolling for general market movements. The direction of these relations is consistent with
each party's relative access to firm-level and industry-level information.
Our results may be a consequence of self-selection. Industry groupings, as defined by
analysts, tend to be highly synchronized. Specifically, Bhojraj et al. (2003) show that
analyst-defined industry classifications are associated with greater return co-movement than
firm groupings based on SIC or NAICS codes. To the extent that analysts tend to follow
firms with strong ties to industry fundamentals (where industry data is inherently more
value relevant), analyst coverage can improve intra-industry information transfers. More-
over, despite common fundamentals, analyst coverage may induce heightened return co-
movement if analysts treat covered firms as a bundled portfolio (i.e., overstate fundamental
correlation and treat the firms as a portfolio of similar securities).'2 Our evidence shows
that the presence of analyst coverage increases return synchronicity, and that analysts are
attracted to firms with common return co-movement. The extent to which increases in co-
movement, given analyst coverage, reflect either the more efficient transfer of intra-industry
information or the naive bundling of less than perfectly correlated firms is an interesting
topic for future research.
12 Barberis and Shleifer (2003) and Barberis et al. (2003), for example, discuss how investors classify firms together,
and how this classification increases return co-movement.
TABLE 6
Relation between the Incremental Explanatory Power of Industry-level Returns and
Activities of Analysts, Institutions, and Insiders
This table presents average coefficients from 17 annual estimations of the following mod
8
R2DIFF,,, = (o + I a/jINDJ,t
j=1 + P REG,t, + 2DIVERS,, + t33FUNDCORR,,, + P4log(HERFi,)
+ 35STDROA,,, + 361og(NINDi,,) + 71,og(MVE,,) + P3RETCORR,,, + 39log(NREV,,)

+ Piolog(AINSTi) + 311log(TRADE,t) + Ei,t
where R2DIFFi,t = R2 - R2. R21 and R2 are the coefficients of determination from the regression
of firm i's return on market and industry returns, and market returns, respectively, during calendar
year t.
Estimation Est. (1) Est. (2) Est. (3) Est. (4) Est. (5)
Intercept 0.067 0.068 0.068 0.067 0.071
(2.86) (2.92) (2.95) (2.89) (3.07)
REG 0.070 0.070 0.070 0.070 0.070
(10.94) (10.95) (10.97) (10.95) (11.01)
DIVERS 0.014 0.014 0.013 0.014 0.013
(6.63) (6.65) (6.47) (6.59) (6.46)
FUNDCORR 0.001 0.001 0.001 0.001 0.001
(7.94) (7.72) (7.77) (8.06) (7.60)
log(HERF) -0.017 -0.017 -0.018 -0.017 -0.017
(-1.53) (-1.48) (-1.61) (-1.55) (-1.57)
STDROA 0.005 0.006 0.002 0.005 0.002
(1.15) (1.45) (0.40) (1.00) (0.34)
log(NIND) 0.009 0.009 0.009 0.009 0.009
(7.82) (7.77) (7.46) (7.73) (7.32)
log(MVE) 0.011 0.011 0.012 0.011 0.011
(10.26) (9.93) (10.26) (10.26) (9.73)
RETCORR -0.167 -0.167 -0.166 -0.167 -0.166
(-7.33) (-7.29) (-7.36) (-7.32) (-7.31)
log(NREV) - 0.002 - - 0.003
(6.08) - - (6.93)
log(AINST) - - -0.021 - -0.038
- - (-5.11) - (-6.15)
log(TRADE) - - - -0.052 -0.039
-(-3.61) (-2.86)
Avg. Adj. R2 23.8% 23.9% 24.0% 23.8% 24.2%
t-statistics (in parentheses) are based on the standard errors derived fro
Impact of Informed Parties on the Timing of Industry- versus Firm-Specific

Earnings Information Incorporation Into Prices
The results in Ball and Brown (1967) suggest that a firm's annual earnings in
can be decomposed into a market component, an industry component, and a fir
component. Using that conclusion, Ayers and Freeman (1997) decompose annua
innovations into these three components and conclude that the industry compone
ings is incorporated into a firm's stock price earlier than the firm-specific comp
cifically, Ayers and Freeman (1997) annually estimate the following cross-sectio
1 1
CAR,,, = + 8, i,t+T + YTFi,l+T + Eit (9)

T=-1 T=-1
where CARi,, is the value-weighted

and market index returns are measu
end of the third month of year t+
earnings innovation are as defined
component
AIEj,, of the annual
is the median current earnings
change innovation,
in firm Ii,t,
earnings for all is measured
firms sharingas AIEj,,
firm - AMEt, where
i's two-digit
SIC code j in year t and AME, is the median AIEj, for all industries in year t. AFEi,, is the
first difference in firm i's earnings divided by its beginning-of-the-year market value. Fi,,,
which represents the firm-specific component of firm i's change in earnings, is measured
as AFEi,, - AlEj,t.
Ayers and Freeman (1997) find that the coefficients on contemporaneous and one-year
ahead industry earnings innovations (80 and 8,) are significantly greater than corresponding
coefficients on the contemporaneous and one-year ahead firm-specific components of earn-
ings changes (-yo and yl1) after controlling for lagged earnings innovations. Moreover, the
coefficient on the lagged firm-specific earnings component is significantly positive (Y-1),
while the coefficient on the lagged industry-level earnings innovation is negative and insig-
nificantly different than zero.
We extend Ayers and Freeman's (1997) methodology to examine whether analyst fore-
casting activity, changes in institutional ownership, and insider trading activity differentially
influence these timing relations in a manner consistent with each party's relative information
acquisition and dissemination advantage. We modify Ayers and Freeman's (1997) meth-
odology to control for a potential misspecification arising from an errors-in-variables prob-
lem, and to control for known cross-sectional determinants of annual returns.13 Specifically,
we estimate the following three cross-sectional models annually between 1984 and 2000:
CARi,t = o + Xl,,t + X2i,t+l + ylF,,, + y2F,,,t+ + X3L,t * log(NREVit)

+ y3Fi,t * log(NREVi,,) + h4li,t+1 * log(NREVi,t)
+ Y"4Fi,t+l * log(NREV,,t) + P3CARi,t+1 + 210og(NREV,,,)

+ P31go(MVEi,t-~) + 4log(MBi,t-1) + Ei,t (10)
13 Following the discussion in Collins et al. (1994), we include next period returns (CAR,,,+) to control for the
unexpected components of future earnings news. This approach has been applied in recent long-window ERC
studies examining the timeliness of earnings (e.g., Lundholm and Myers 2002; Gelb and Zarowin 2002). We
also include the log of firm size and market-to-book ratios to control for differences in returns arising from
these factors.
CARi,t = ot + Xlli,t + X2i,t+l + 1 1Fi, + Y 2Fi,t+ + I X3i,t * log(AINST,,,)

+ y-3Fi, * log(AINST,,) + X4i,t+1 * log(AINST,t,)
+ Y4Fi,t+l * log(AINSTi,t) + I1CARi,t+ + P21og(AINSTi,)
+ 33log(MVEi,t-1) + 4log(MBi,t-1) + Ei,t (11)
CARi,t = ao + Xlli,t + X2li,t++1 - Y1F,,, + y2Fi,t + + 3i,t * log(TRADE,,,)
+ -3Fi,t * log(TRADE,,t) + X\4i,,+1 * log(TRADE,,,)

+ Y4Fi,t+l * log(TRADE,,,) + PICARi,t, + 32log(TRADEi,)
+ " 3log(MVE,,,t-1) + P4'og(MBi,t-1) + si,t. (12)

The mean value of the distribution of generated coefficients from these 17 estimations
are tested against a null of zero. Consistent with Ayers and Freeman (1997), only December
31 year-end firms are included in the return-earnings sample, and the sample is restricted
to two-digit SIC industries with at least ten firm-year observations. Firm-year observations
containing an absolute earnings realization greater than 1.5 are excluded from the sample.
All earnings and price data are obtained from Compustat and CRSP, respectively. The
sample is 22,535 firm-year observations.
Table 7, Panel A, presents descriptive statistics for this subsample of firms. In general,
these firms are larger, with greater levels of analyst, institutional, and insider activity. In
terms of annual earnings innovations, the mean ROE and AROE realizations are 0.047 and
0.010, respectively. In terms of industry earnings components, the average change in
industry-specific earnings before and after adjusting for market-wide earnings innovations
(AlE and I) is 0.006 and 0.000, respectively. The mean firm-specific earnings innovation
(F), after controlling for the median change in industry earnings, is 0.007.
Table 7, Panels B and C, present average coefficients from annual estimations of Equa-
tions (9) through (12). Equation (9) (Panel B) replicates the model in Ayers and Freeman
(1997) with the addition of controls for future return, firm size, and market-to-book ratio,
and with the lagged earnings term omitted. Consistent with Ayers and Freeman's (1997)
results, the coefficients on Ii,, and Ii,,, are positive and significantly greater than the coef-
ficients
Panelon
C Fi,t and additional
presents Fi,,,, respectively.14
evidence on these return-earnings relations, conditional on
the level of analyst forecasting activity (Equation (10)), changes in institutional ownership
(Equation (11)), and insider transactions (Equation (12)). Consistent with the argument that
analysts increase the firm's overall information environment, our estimation reveals that
both the industry- and firm-specific components of next period's earnings are more strongly
associated with current period returns in the presence of analyst forecasting activities (X4
> 0 and y4 > 0). Thus, analyst revisions accelerate incorporation of both components of
future earnings news into stock price, consistent with analysts' activities both communi-
cating firm-specific information and improving intra-industry information transfers.'5 The
coefficient on contemporaneous firm-specific earnings interacted with analyst activity is
14 Ayers and Freeman (1997) include lagged, concurrent, and leading earnings components in their model. Our
focus is on the incorporation of future information. Similar to other FERC studies, we only control for concurrent
earnings in our models. Results are similar if lagged earnings terms are included.
15 Ayers and Freeman (2003) show that firms with analyst coverage have more timely prices with respect to future
earnings news. Our results confirm their findings and suggest that the improvement in timeliness is due to the
acceleration of both the industry and firm-specific components of earnings.
TABLE 7
Impact of Informed Parties on the Timing of the Incorporation of Industry
Panel A: Descriptive Statistics

This panel presents descriptive statistics for a subsample of December 31 year-end firm
observations to estimate Equations (10) through (12). All variables are as defined in t
Mean Std 5% Q1 Media

Components of annual earning
ROE 0.047 0.148 -0.165 0.027 0.066
AROE 0.010 0.132 -0.130 -0.014 0.00
AlE 0.006 0.016 -0.015 -0.0001 0.00

I 0.000 0.015 -0.018 -0.006 0.000
F 0.007 0.121 -0.115 -0.018 0.0006
Measures of informed tradin

NREV 20.247 38.106 0.000 0.000 2.000
log(NREV) 1.634 1.728 0.000 0.000 1.0

AINST (%) 16.674 56.413 0.000 1.561 6.58
log(AINST) 0.126 0.194 0.000 0.015 0.0
TRADE (%) 0.870 3.878 0.000 0.0006 0.0
log(TRADE) 0.008 0.032 0.000 0.00001 0.00
Firm characteristics
MVE 2,934.1 12,903.3 9.983 62.210 278.030
log(MVE) 5.707 2.164 2.300 4.131 5.62
e- MB 2.866 10.497 0.580 1.142 1.699
ta log(MB) 0.608 0.794 -0.544 0.132 0.53
CAR 0.021 0.504 -0.670 -0.231 -0.00
44
t~3
;sl
cs
c~
o
x
;s
;s
crc,
3e,
TABLE 7 (continued)
O Panels B and C present average coefficients from the annual estimation of the following models:
r,
ch
u
CARi, = a + XFli,, + X22l,,+1 + Y,1F3, + y2Fg,tEI + X3I3,, * log(NREVE,,) + y+3Fi,t * log(NRE V,,) + X4hi,t+ * lo
o
o
+ 1ICAR,,,tI + 210og(NREVt,) + 33log(MVEi,,_1) + 04log(MBi,t-l) + i,t
CARi,t = ao + X1li,t + X21i,t+1 + 1,,, + y2Fi,t+ + X31,, * log(AINST,) + Y3Fi,t * log(AINST,,,) + X4i't+1 * log(AINST,,)
+ y4Fi,,+, * log(AINST,,) + P,3CARi,,+, + f321og(AINSTi,) + f31log(MVE,,, ) + +41og(MBi,-t_) + Ei,

CARi,, = oa + Xll,t + X2li,t+? + -YFi,t + y2F,,,+, + X31i,t*log(TRADE,t,) + y3FI,*log(TRADEi,,) + X4i,,t+1 log(TRADE,,) + y
p + PCCAR,,,,t + 21log(TRADE,,,) + 331og(MVE,,,) + 341og(MBi,,_j) + i+,,
p
17 cross-sectional annual estimations were performed. t-statistics based on the empirical distribution of annual coefficients are presented
variables are defined in the Appendix.
Panel B: Confirmation of Ayers and Freeman's (1997) Result
Intercept it, It+ F, F,+1 CARt+1 log(MVE)

0.064 2.511 1.184 0.545 0.189 -0.029 -0.01
(1.10) (4.91) (1.80) (11.33) (5.93) - - - - (-0.91) - (-
Panel C: Relation between Current Returns and Future Earnings Components Conditional on the Number
Changes in Institutional Ownership, and Insider Trading
It* Ft* It+1 Ft+
Intercept I, It+l F, Ft+, log(N
0.074 3.293 0.328 0.514 0.101 -0.499 0.055 0.448 0.082 -0.028 0
(1.20) (5.83) (0.4) (9.78) (2.18) (-3.14) (2.10) (2.25) (3.04) (-0.97) (2
r
r
P
V\ It* Ft* It+,* F+1
Intercept I, It+1 Ft Ft+1 log(AINST) log(AINST) log(AINST) log(AINST) CAR+1 log(
0.106 2.186 1.062 0.481 0.153 -2.591 -0.441 0.116 0.373 -0.025 0
(1.50) (4.57) (1.78) (7.52) (3.80) (-1.45) (-1.47) (0.09) (1.96) (-0.97) (
;S~?
c5
c5
Intercept I, It+1 Ft Ft+1 log(TRADE) log(TRADE
It* F* It+1* Ft+
O
E 0.069 2.277 1.377 0.532 0.167 26.709 9.243 -22.118 3.973 -0.027 -0
;S
(1.11) (4.82) (2.25) (10.30) (4.83) (2.79) (1.53) (-2.03) (2.00) (-0.9
Crq
3er
ca
O
cs
u
E3
O
O
-Ea
positive (y3 > 0), while the coeffi

with analyst activity is negative (X
pre-empting industry news versu
The second estimation in Panel C
and future earnings conditional on
tinues to have a larger uncondition
in institutional holdings significan
(y4 > 0) in current returns. In con
on the incorporation of future indu
activity is associated with an accel
alone.17
Finally, our estimation of Equat
tional on insider trading activity.
based on future firm-specific earnin
and the firm-specific components of
trading activity increases (y4 > 0)
significant negative effect on the
result consistent with insider trad
financial analysts (thereby impeding
The evidence suggests that both
poration of only firm-specific earni
incorporation of both earnings co
are consistent with each party's r
terpretation that cross-sectional var
in the type of information flowin
V. CONCLUSION
This paper examines how three informed market participants-financial an
stitutional investors, and insiders-influence stock return synchronicity, where
synchronicity is the extent to which firm-level returns are explained by industry a
returns. If these parties primarily facilitate the incorporation of industry- and mar
information into prices, returns will display greater synchronicity. Conversely,
will exhibit less synchronous movement if these parties contribute primarily f
information and do not aid in the intra-industry transfer of information. Con
each party's relative information advantage, we find that insider transactions
flow of firm-specific information into individual stock prices, while analyst ac
to greater price synchronization. We are unable to document a consistent relat
16 These inferences are robust to scaling changes in institutional holdings by both trading volu
outstanding (results not tabulated).
17 Jiambalvo et al. (2002) document that higher levels of institutional holdings contribute to more
In untabulated regressions, we find a similar effect with institutional holdings increasing the assoc
current returns and future earnings news. Furthermore, the effect of institutional holdings is stronger
level earnings news than for firm-level earnings news, consistent with inferences obtained in Tabl
18 For robustness, we have re-estimated Equations (10) through (12) after interacting both current an
specific and industry earnings components with firm size and the firm's market-to-book ratio
and Myers 2002). Inferences regarding the informational impact of the informed parties' activit
changed after including these additional interaction terms.
stock return synchronicity and changes in institutional holdings. The positive a

between stock return synchronicity and analyst activities is posited to be a con
improved intra-industry information transfers-analysts gather information at both
and industry levels, and their industry affiliation and expertise allows them to bette
and disseminate common information across all firms in the industry. Additiona
that insider and institutional trading accelerates the incorporation of firm-specif
news into stock prices, while analyst activity accelerates the incorporation of b
specific and industry-level earnings news into prices. By directly measuring th
which prices differentially incorporate specific components of one type of infor
are able to reinforce our information-based interpretation of stock return synchroni
Our primary contribution is to document that cross-sectional variation in sto
synchronicity is associated with the presence of informed parties' activities. O
have several implications. First, analyst following appears to increase stock ret
movement. Consistent with recent research by Ramnath (2002), our results su
analysts facilitate the transfer of price-relevant information across peer firms. An i
question is whether the amount of observed co-movement, given analyst cove
timal. Specifically, although analyst coverage improves intra-industry information tr
do industry affiliations increase co-movement beyond what is supported by the
fundamentals of the industry (e.g., Barberis et al. 2003)? Second, recent cross-
studies suggest that less synchronicity at the country level is equivalent to more
prices. In developed markets, such an interpretation of "informed" prices may b
analysts make prices more efficient via intra-industry and market-wide informa
fers. Future research needs to exercise caution when using the level of stock re
chronicity to measure how informed prices are. Our results are consistent with
informed trade crowding out other types of informed trade. Bushman et al. (2005) do
increases in the depth and breadth of analyst coverage in a country following
forcement of laws regulating insider trading. Combined with our results, it a
insider-trading restrictions lead to a substitution of firm-specific information p
insider trades for the industry-level information provided by analysts. Whether such
off is optimal for purposes of capital allocation decisions is an important ques
regulators and for future research.
Finally, our paper has several implications for accounting researchers. First
ognizing that firm performance can be disaggregated into firm-specific, indu
market-level components, we introduce stock return synchronicity as a reasona
for evaluating the relative amount of information reflected in stock prices. S
results suggest that analysts and their forecasting activities serve (at least) two r
price formation process: (1) to gather and disseminate information unique to th
(2) to identify and extract common information from firm, industry, and/or m
signals and to disseminate the value-relevant portion of such information acros
in the industry. Finally, prior accounting research shows that insiders trade on
formation about future earnings performance (e.g., Ke et al. 2003; Piotroski and
2005). Our results suggest that insiders generally trade on the firm-specific com
future earnings news.
APPENDIX
Variable Definitions
Variable Definition
Information Flow Variables
R2 = the coefficient of determination from the firm-year estimation of the model:
RETi,, = ao + P1MARETi,t + 32MARETi,, 1 + 3INDRET,,

+ P4INDRETi,t-1 + Ei, t
where MARET is the value-weighted market return and INDRET is the two-
digit SIC industry value weighted return for week t (not including the return
of firm i);
SYNCH = logarithmic transformation of R2, defined as log (R2/(1 - R2));
R2DIFF = the difference between R2 (as defined) and the R2 from the following
regression:
RETi,, = o + P31MARETit + 32MARETi,,_1 + ,it;
R2DIFF equals the incremental explanatory power of industry-level returns

over market returns to explain variation in firm-level returns; and
CAR = summation of market-adjusted monthly returns for year t; firm and value-
weighted market returns are measured from the fourth month of year t to
the third month of year t + 1.
Informed Trading Proxies
NREV = the number of forecast revisions of one-year-ahead forecasts of annual
earnings during the calendar year;
AINST = the absolute change in the number of shares held by institutions, as a
fraction of annual trading volume;
INST = the aggregate number of shares held by institutions, scaled by shares out-
standing, at the beginning of the fiscal year;
TRADE = the absolute value of total shares purchased by insiders less total shares
sold by insiders, as a fraction of annual trading volume; and
log(-) = the log of each informed trading proxy is calculated as the log of one plus
the respective raw realization of that proxy.
Independent Variables
Ii,, = industry-component of firm i's change in earnings; measured as AMEj,
- AME,, where MEj,, is the median annual change in firm earnings for all
firms sharing firm i's two-digit SIC code j in year t and AMEt is the median
AIEj,t for all industries in year t;
F,, = the firm-specific component of firm i's change in earnings; measured as
AFE,, - AIEj,, where AFE,, is the first difference in firm i's earnings
divided by its beginning of the year market value;
MVE = the market value of equity at the beginning of the calendar year;
STDROA = the standard deviation of return on assets (ROA) measured over the years
1984 through 2000;
DIVERS = a revenue-based Herfindahl index of firm diversification using rep

business segments;
FUNDCORR= the logarithmic transformation of the R2 from a regression of the f
quarterly return on assets on a value-weighted industry index of RO
FUNDCORR is estimated every three years using 12 quarterly observat
in each firm-specific regression;
HERF = a revenue-based Herfindahl index of industry-level concentration;
NIND = the average number of firms used to calculate the weekly industry r
index;
REG = an indicator variable equal to 1 if the firm operated in a regulated industry,
defined as the two-digit SIC codes industries 62 (financial institutions) and
49 (utilities), 0 otherwise;
INDj = an indicator variable equal to 1 if the firm operated in one-digit SIC code
industry j, 0 otherwise; a unique indicator variable exists for each one-digit
SIC code industry 1 through 8;
RETCORR = Spearman correlation between weekly MARET and value-weighted industry
returns;
ROA = return on assets, measured as income before extraordinary items scaled by
average total assets;
abs(AROA) = absolute change in the current year's return on assets;
abs(RET) = absolute market-adjusted return for the firm for the preceding year (i.e.,
year t - 1), where market returns are defined as the value-weighted market
return (including dividends);
MB = market-to-book ratio, measured as MVE scaled by beginning-of-the-year
book value of equity; and
SHRTURN = share turnover, defined as total annual volume scaled by total shares
outstanding.
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The Influence of Analysts, Institutional Investors, and Insiders on the Incorporation of

Market, Industry, and Firm-Specific Information into Stock Prices

American Accounting Association is collaborating with JSTOR to digitize, preserve and

The Influence of Analysts, Institutional

Keywords: stock return synchronicity; insider trading; institutional ownership; financial

Editor's note: This paper was accepted by Lawrence Brown, Editor.

The Accounting Review, October 2004

In contrast, institutional investors can be either quasi-insiders or outsiders dependi

The Accounting Review, October 2004

three parties influencing the in

II. RESEARCH DESIGN, VARIABLE DEFINITIONS, AND DATA

The Accounting Review, October 2004

Measurement of Stock Return Synchronicity

RETi,t = x + IMARET,,,_1 + 32MARETi,t + P3INDRETi,t-_

The Accounting Review, October 2004

Measurement of Informed Parties' Information Dissemination Activities and Their

III. EMPIRICAL RESULTS

The Accounting Review, October 2004

Stock Return Synchronicity

trading. Given this large proportion of "zero" ob

The Accounting Review,

less than 8.0 percent. Given that t

Impact of Informed Market Participants on the Relative Amount of Market-Level,

SYNCH,,, = 0o0 + E atIlNDj,

+ 34log(HERF,,,) + PfSTDROA,t, + 36log(NINDi,t)

The Accounting Review, October 2004

SYNCH REG DIVERS FUNDCORR log(HERF) STDROA log(NIND) log(MVE) log(N

controlling for these attribut

The Accounting Review, October 2004

Relations between Stock Return Synchronicity and Analyst Forecast

This table presents average coefficients from 17 annual estimations of t

+ P35STDROA,,, + P61og(NIND,t) + 3710og(MVE,,) + 38log(NREV,,,)

See the appendix for variable definitions. Average coefficients fr

We also include the average number of firms in the industry

The Accounting Review,

in the data, we take the loga

Relation between Informed

SYNCH,,, = oto + j=l1

+ P4ROAi,t + P351log(SHRTURNit) + I6SYNCHi,t + e

+ P4log(HERFi,) + P5STDROA,,t + 36log(NINDi,)

log(AINSTi,,) = ato + X aEIND,,, + 1REG,,, + P321og(MVEi,,)

SYNCH,,, = ao0 + a oiNDJ,,

+ 3410og(HERF,,t) + p5STDROAi,, + 361og(NINDi,,)

log(TRADE,,,) = o + a olND',, +j=l1

The Accounting Review, October 2004

+ P341g(HERF,,) + PsSTDROAi,, + 610og(NINDi,,) + 71,og(MVEi,)

log(AINSTi,,) = o + o/jlNDO,j=1+ IREGi,, + 210og(MVE,,,) + p3log(SHRTURN,,)

+ P4abs(AROA,,,t+) + pslog(MB,,,) + I6abs(RETi,,-1) + P7SYNCH,t + Ei,t

log(TRADEi,) = ao + a/otJND, j=I

P4abs(AROA,t+ 1) + P51log(MBi,,) + 36abs(RET,1t-1) + 7SYNCHi,t + i,t

The Accounting Review, October 2004

Dependent Analyst Revisions Institutional Trading Insider Trading

See the Appendix for variable definitions.

The Accounting Review, October 2004

since trading by institutions an

Measurement of Industry and Market Returns and Additional Control Variables

Measurement of Informed Insider Transactions: Net Trades versus Total Trades

The Accounting Review, October 2004

Relations Conditional on Firm Size