R2: Does It Matter for Firm Valuation?

27 Pages Posted: 10 Jul 2010

See all articles by John D. Stowe

John D. Stowe

Ohio University

Xuejing Xing

University of Alabama at Huntsville

Multiple version iconThere are 2 versions of this paper

Abstract

A considerable amount of research has been devoted to why R2 differs across firms or markets, although 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.

Keywords: R², Tobin's Q, stock price synchronicity, firm value

JEL Classification: G11, G12, G14

Suggested Citation

Stowe, John D. and Xing, Xuejing, R2: Does It Matter for Firm Valuation?. The Financial Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1636408

John D. Stowe (Contact Author)

Ohio University ( email )

640 Copeland
Athens, OH 45701
United States
(740) 593-9439 (Phone)

Xuejing Xing

University of Alabama at Huntsville ( email )

Huntsville, AL 35899
United States

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