Synchronicity: Theory and Evidence1

This paper argues that, contrary to the conventional wisdom, stock return synchronicity (or R2) can increase when transparency improves. In a simple model, we show that, in more transparent environments, stock prices should be more informative about future events. Consequently, when the events actually happen in the future, there should be less “surprise”, i.e., there is less new information impounded into the stock price. Thus a more informative stock price today means higher return synchronicity in the future. We find empirical support for our theoretical predictions in three settings, namely firm age, seasoned equity issues, and listing of ADRs