Comparable firms and the precision of equity valuations

I investigate the relationship between the amount of information provided b y a firm's comparables (i.e., firms in the same line of business as the fir m being valued) and the precision of the firm's equity valuation. When inve stors have more information, previous studies argue that investors can make a more precise estimate of a firm's true equity value and this implies a l ower (excess) stock return volatility around corporate events such as earni ngs announcements. I develop a simple model that shows a negative relations hip between the amount of information provided by a firm's comparables and the firm's stock return volatility. Using alternative measures of informati on provided by comparables and different definitions of comparables, I cons istently find a negative and significant relationship between these informa tion measures and stock return volatility, ceteris paribus. (C) 2001 Elsevi er Science B.V. All rights reserved.