Does Greater Firm-Specific Return Variation Mean More or Less Informed Stock Pricing?

64 Pages Posted: 9 Oct 2008

See all articles by Art Durnev

Art Durnev

University of Iowa - Henry B. Tippie College of Business

Randall Morck

University of Alberta - Department of Finance and Statistical Analysis; National Bureau of Economic Research (NBER); European Corporate Governence Institute; Asian Bureau of Finance and Economic Research

Bernard Yin Yeung

National University of Singapore - Business School

Paul Zarowin

New York University (NYU) - Department of Accounting

Multiple version iconThere are 4 versions of this paper

Date Written: May 2001

Abstract

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 ⬠higher firms-specific returns variation as a fraction of total variation signals more information-laden stock prices and, therefore, more efficient stock markets.

Suggested Citation

Durnev, Artyom and Morck, Randall K. and Yeung, Bernard Yin and Zarowin, Paul, Does Greater Firm-Specific Return Variation Mean More or Less Informed Stock Pricing? (May 2001). NYU Working Paper No. PAUL ZAROWIN-05. Available at SSRN: https://ssrn.com/abstract=1281358

Artyom Durnev (Contact Author)

University of Iowa - Henry B. Tippie College of Business ( email )

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