The Effect Of Companies’ Idiosyncratic Risk And Transparency On Stock Return

Risk is an eternal topic in financial market research. Researchers have found that in recent years, systematic risk gradually decayed but meanwhile idiosyncratic risk increased over the global market. This phenomenon attracted many research interests on the role played by idiosyncratic risk, especially on whether idiosyncratic risk is a pricing factor. However, no unanimous conclusion has been reached so far. China’s stock market has experienced rapid development over the past 20 years, but prominent information asymmetry problem hinder the efficiency level of the market. On a weak-form efficient market, information transparency is supposed to be closely associated with idiosyncra tic risk, but researchers who examined the relationship between the two have found it is not always so. As an attempt to resolve these controversy findings, we try to expand this field of research by studying the interaction effect of idiosyncratic risk an d information transparency on stock returns.We developed the research framework around two key factors, namely idiosyncratic risk and information transparency. First of all, we build two multiple linear regression models and validate first two hypotheses respectively. Secondly, it is necessary to put two influence factors in the same multivariate linear regression model. Meanwhile, we add an interaction term to previous model so that we can analyze the influence of interaction term. Finally, we put forwards three hypotheses and build four models. Before our empirical analyses,we should perform descriptive analyses, correlation analyses and unit root test. After assuring the applicability of the sample data, we analyze the results of the multiple linear regressions. Importantly, we can get similar results after sufficient robustness tests. Finally we get following conclusions:Because of those positive regression coefficients of idiosyncratic risk and information transparency, investors should choose those stocks with high idiosyncratic risk or high information transparency. What’s more, we get our key conclusions according to the positive correlation coefficients of independent variables and negative correlation coefficient of interaction term. The positive effect of information transparency on stock retur n will gradually weaken when idiosyncratic risk is increasing and positive effect of idiosyncratic risk on stock return will gradually weaken when the information transparency is increasing.