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

Posted: 17 Oct 2003  

Art Durnev

University of Iowa - Henry B. Tippie College of Business

Randall Morck

National Bureau of Economic Research (NBER); University of Alberta - Department of Finance and Statistical Analysis

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

Abstract

Roll [1988] observes low R2 statistics for common asset pricing models due to vigorous firms-specific return 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 return variation as a fraction of total variation signals more information-laden stock prices and, therefore, more efficient stock markets.

JEL Classification: G12, G14, M41

Suggested Citation

Durnev, Art and Morck, Randall and Yeung, Bernard Yin and Zarowin, Paul, Does Greater Firm-specific Return Variation Mean More or Less Informed Stock Pricing?. Journal of Accounting Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=438942

Artyom Durnev (Contact Author)

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

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Randall K. Morck

National Bureau of Economic Research (NBER)

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Bernard Yin Yeung

National University of Singapore - Business School ( email )

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Paul Zarowin

New York University (NYU) - Department of Accounting ( email )

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