Does idiosyncratic volatility always reflect transparency? Evidence from Chinese equity and bond markets

Inferior levels of information transparency have, for some time, been positively associated with lower levels of idiosyncratic volatility, particularly when explaining the elevated synchronicity of emerging stock markets. While idiosyncratic volatility reflects firm-specific information, in environments of reduced property- right protection, firm-specific information is found to be inefficiently valued. However, when considering Chinese firms, we find that elevated idiosyncratic volatility is associated with reduced rather than improved transparency. Utilising related bond characteristics and unique data inferring information risk while controlling for other factors, such as default risk, we find that bonds issued by firms with higher idiosyncratic volatility possess lower credit ratings and higher yield spreads. Additionally, firms with higher idiosyncratic volatility are prone to issue callable bonds to mitigate under-investment problems. Therefore, idiosyncratic volatility is found to be positively associated with elevated information risk, while higher, rather than lower, idiosyncratic volatility is identified as a pronounced characteristic directly related to more opaque information quality. Results are robust after controlling for market development, regulatory maturity, and increasing globalisation.