Comment letters and stock price synchronicity: evidence from China

This paper studies the effectiveness of comment letters by exploring the relationship between comment letters and stock price synchronicity. Using a unique dataset from China, we find that the issuance of comment letters is negatively correlated with stock price synchronicity. The results are robust to a battery of tests. Further analysis indicates that the negative relationship between comment letters and stock price synchronicity is more prominent for non-state-owned enterprises (non-SOEs) than SOEs. Then, we explore what channels comment letters affect the stock price synchronicity. Our evidence shows that firms receiving comment letters (1) have a high negative skewness indicating more negative information released, and (2) are more likely to amend their annual financial reports, leading to less stock price synchronicity. Overall, the evidence indicates that the comment letter process can help increase the firm information incorporated in the stock price.