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

Durnev, Art; Morck, Randall; Yeung, Bernard Yin; Zarowin, Paul

doi:10.2139/ssrn.272287

Download This Paper

Open PDF in Browser

Add Paper to My Library

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

64 Pages Posted: 14 Jun 2001

See all articles by Art Durnev

Art Durnev

University of Iowa - Henry B. Tippie College of Business

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

There are 4 versions of this paper

Date Written: May 21, 2001

Abstract

Roll (1988) observes low R2 statistics for common asset pricing models due to vigorous firms-specific returns variation not associated with public information. He concludes (p. 56) that this implies "either private information or else occasional frenzy unrelated to concrete information." 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 Roll'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.

Keywords: Stock price informativeness; Functional efficiency

JEL Classification: G10, G14, M41

Suggested Citation: 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 21, 2001). Available at SSRN: https://ssrn.com/abstract=272287 or http://dx.doi.org/10.2139/ssrn.272287