R2: Does it Matter for Firm Valuation?

Abstract:     
A considerable amount of research has been devoted to why R² differs across firms or markets, but little attention has been paid to the consequences of this difference. We fill this gap by investigating how differing R² affects investors assessment of firm value. Using a sample of 90,111 firm-year observations from 1970 to 2004, we find that higher R² leads to higher firm valuation and that, on average, high-R² firms experience significant underperformance in the long run. These results suggest that high-R² firms tend to be overpriced.

Number of Pages in PDF File: 18

Keywords: R², Tobins Q, stock price synchronicity, firm value, assessment

JEL Classification: G11, G12, G14

Accepted Paper Series