Does High Stock Return Synchronicity Indicate High or Low Price Informativeness? Evidence from a Regulatory Experiment

We investigate the link between stock return synchronicity and price informativeness by exploiting the Regulation SHO pilot program, which removed short-selling price tests for randomly selected stocks (“pilot stocks”) in May 2005. A difference-in-differences analysis reveals that relative to non-pilot stocks, pilot stocks saw a significantly larger increase in both price informativeness and return synchronicity when the pilot program started, but such difference disappeared when Regulation SHO removed the short-selling price tests for all stocks in July 2007. The results suggest that high return synchronicity reflects high, rather than low price informativeness.