JFRM  Vol.3 No.4 , December 2014
The Market Pricing of Information Risk: From the Perspective of the Generating and Utilizing of Information
Abstract: Generating and utilizing are the two sources of the information risk, reflecting the quality of financial reporting and investors’ information interpreting ability respectively. Using accrual quality to represent the financial reporting quality and the earnings transparency to represent investors’ information interpreting ability, we examine the correlation among them. By combining the generating and utilizing steps of information, we construct a two-dimensional information risk factor, which equals the excess return of portfolios in high-risk areas subtract that in low-risk areas. Then, taking the Fama-MacBeth two-stage cross-sectional regression procedure, we test whether the information risk factor is a pricing factor with individual stocks and industry portfolios respectively, and the empirical results support the point that information risk is priced by market.
Cite this paper: Zhang, X. and Li, X. (2014) The Market Pricing of Information Risk: From the Perspective of the Generating and Utilizing of Information. Journal of Financial Risk Management, 3, 166-176. doi: 10.4236/jfrm.2014.34014.

[1]   Barth, M. E., Konchitchki, Y., & Landsman, W. R. (2013). Cost of Capital and Earnings Transparency. Journal of Accounting and Economics, 1, 207-224.

[2]   Berk, J. B. (2000). Sorting out Sorts. The Journal of Finance, 55, 407-427.

[3]   Chen, S., Shevlin, T., & Tong, Y. H. (2007). Does the Pricing of Financial Reporting Quality Change around Dividend Changes? Journal of Accounting Research, 45, 1-40.

[4]   Core, J. E., Guay, W. R., & Verdi, R. (2008). Is Accruals Quality a Priced Risk Factor? Journal of Accounting and Economics, 46, 2-22.

[5]   Dechow, P. M., Sloan, R. G., & Sweeney A. P. (1995). Detecting Earnings Management. Accounting Review, 70, 193-225.

[6]   Easley, D., & O’hara, M. (2004). Information and the Cost of Capital. The Journal of Finance, 59, 1553-1583.

[7]   Fama, E., & French, K. (1993). Common Risk Factors in the Returns on Stocks and Bonds. Journal of Financial Economics, 33, 3-56.

[8]   Fama, E., & MacBeth, J. (1973). Risk, Return, and Equilibrium: Empirical Tests. The Journal of Political Economy, 81, 607-636.

[9]   Francis, J., LaFond, R., Olsson, P., & Schipper, K. (2005). The Market Pricing of Accruals Quality. Journal of Accounting and Economics, 39, 295-327.

[10]   Kim, D., & Qi, Y. (2010). Accruals Quality, Stock Returns, and Macroeconomic Conditions. Accounting Review, 5, 937-978.

[11]   Lambert, R., Leuz, C., & Verrecchia, R. (2007). Accounting Information, Disclosure, and the Cost of Capital. Journal of Accounting Research, 45, 385-420.

[12]   Mouselli, S., Jaafar, A., & Goddard, J. (2013). Accruals Quality, Stock Returns and Asset Pricing: Evidence from the UK. International Review of Financial Analysis, 30, 203-213.

[13]   Yu, L., & Wang, Y. (2007). Information Risk and Market Pricing. Management World, 2, 76-85. (In Chinese)