The Use of The R2 as a Measure of Firm-Specific Information: A Cross-Country Critique

26 Pages Posted: 2 Feb 2010

See all articles by Paulo Alves

Paulo Alves

Universidade Católica Portuguesa, Católica Porto Business School; Lancaster University Management School - ICRA

Ken V. Peasnell

Lancaster University - Department of Accounting and Finance

Paul A. Taylor

Lancaster University

Date Written: 2009-07

Abstract

Recent research uses the degree of stock returns co-movement as a measure of the quality of a country's information environment. It has been argued that stronger property rights, better corporate governance regimes and more efficient enforcement mechanisms lead to prices incorporating more firm-specific information and, therefore, co-moving less with the market. In this paper, we use a much more comprehensive international data set than in prior research, encompassing forty countries over twenty years, to evaluate the reliability of this approach in a cross-country setting and to analyse the behaviour of the measure used. Our results demonstrate severe limitations in the use of co-movement as a measure of information quality. We highlight the instability of the measure and show that it can produce results that are often difficult to reconcile with such an informational explanation.

Suggested Citation

Alves, Paulo and Peasnell, Kenneth V. and Taylor, Paul Anthony, The Use of The R2 as a Measure of Firm-Specific Information: A Cross-Country Critique (2009-07). Journal of Business Finance & Accounting, Vol. 37, Issue 1-2, pp. 1-26, January/March 2010. Available at SSRN: https://ssrn.com/abstract=1546167 or http://dx.doi.org/10.1111/j.1468-5957.2009.02181.x

Paulo Alves

Universidade Católica Portuguesa, Católica Porto Business School ( email )

R. de Diogo Botelho, 1327
Porto, Porto 4169-005
Portugal

HOME PAGE: http://www.catolicabs.porto.ucp.pt/en/who-is/paulo-alves/1639

Lancaster University Management School - ICRA ( email )

Lancaster, Lancashire LA1 4YX
United Kingdom

Kenneth V. Peasnell

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
+44 1524 593631 (Phone)
+44 1524 847321 (Fax)

Paul Anthony Taylor

Lancaster University ( email )

The Management School
Lancaster LA1 4YX
United Kingdom
01524 593621 (Phone)
01524 84731 (Fax)

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