Does Greater Firm-Specific Return Variation Mean More or Less Informed Stock Pricing?
Journal of Accounting Research 41(5)797, 2003
University of Alberta School of Business Research Paper No. 2013-614
Posted: 7 Jun 2013
There are 4 versions of this paper
Does Greater Firm-Specific Return Variation Mean More or Less Informed Stock Pricing?
Does Greater Firm-Specific Return Variation Mean More or Less Informed Stock Pricing?
Date Written: November 14, 2003
Abstract
Roll [1988] observes low R2 statistics for common asset pricing models due to vigorous firm-specific return variation not associated with public information. He concludes that this implies “either private information or else occasional frenzy unrelated to concrete information” [p. 56]. We show that firms and industries with lower market model R2 statistics exhibit higher association between current returns and future earnings, indicating more information about future earnings in current stock returns. This supports Roll's first interpretation: higher firm-specific return variation as a fraction of total variation signals more information-laden stock prices and, therefore, more efficient stock markets.
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