Does Greater Firm-Specific Return Variation Mean More or Less Informed Stock Pricing?
University of Iowa - Henry B. Tippie College of Business
University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER)
Bernard Yin Yeung
National University of Singapore - Business School
New York University (NYU) - Department of Accounting, Taxation & Business Law
NYU Working Paper No. 2451/27594
Roll (1988) observes low R2 statistics for common asset pricing models due to vigorousfirms-specific returns variation not associated with public information. He concludes (p. 56) that this implies â¬Seither private information or else occasional frenzy unrelated to concrete information.â¬?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 Rollâ¬"s first interpretation â¬ higher firms-specific returns variation as a fraction of total variation signals more information-laden stock prices and, therefore, more efficient stock markets.
Number of Pages in PDF File: 64working papers series
Date posted: October 9, 2008
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