An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Bixia Xu
Wilfrid Laurier University

Abstract: Capricious market behavior is theoretically documented in the literature as a competing description of investors’ behavior in terms of response to new information. Empirical evidence on the existence of this behavioral bias is rather limited. Moreover, causes of this behavior and its effect on share price volatility are largely unexplored. In the setting of the biotech industry, this study identifies this behavior and finds information uncertainty is a major explanation. More disclosure of uncertain information especially non-financial performance information increases the exposure to capricious market expectation revisions and results in high share price volatility. Biotech firms in fact face a dilemma caused by information uncertainty. Consequently, they do not appear to benefit from more disclosure in terms of reducing information asymmetry as commonly captured by bid-ask spread.

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