R2 and the Economy

Posted: 8 Nov 2013

See all articles by Randall Morck

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

Wayne Yu

City University of Hong Kong

Date Written: November 2013

Abstract

The characterization of firm-specific return volatility as the intensity with which firm-specific events occur reconciles many seemingly discordant results. A functionally efficient stock market allocates capital to its highest value uses, which often amounts to financing Schumpeterian creative destruction, wherein creative winner firms outpace destroyed losers, who could be the previous year’s winners. This rise in firm-specific fundamentals volatility elevates firm-specific return volatility in a sufficiently informationally efficient stock market. These linkages are interconnected feedback loops rather than unidirectional chains of causality.

Suggested Citation

Morck, Randall K. and Yeung, Bernard Yin and Yu, Wayne, R2 and the Economy (November 2013). Annual Review of Financial Economics, Vol. 5, pp. 143-166, 2013. Available at SSRN: https://ssrn.com/abstract=2351823 or http://dx.doi.org/10.1146/annurev-financial-110112-120936

Randall K. Morck (Contact Author)

University of Alberta - Department of Finance and Statistical Analysis ( email )

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National Bureau of Economic Research (NBER)

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European Corporate Governence Institute ( email )

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Asian Bureau of Finance and Economic Research ( email )

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Bernard Yin Yeung

National University of Singapore - Business School ( email )

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Singapore, 119245
Singapore
65 6516 3075 (Phone)
65 6779 1365 (Fax)

Wayne Yu

City University of Hong Kong ( email )

Kowloon
Hong Kong

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