R-Squared Around the World: New Theory and New Tests

Posted: 16 Dec 2005

See all articles by Stewart C. Myers

Stewart C. Myers

Massachusetts Institute of Technology (MIT); National Bureau of Economic Research (NBER)

Li Jin

Harvard Business School - Finance Unit

Multiple version iconThere are 3 versions of this paper

Abstract

Morck, Yeung and Yu show that R2 is higher in countries with less developed financial systems and poorer corporate governance. We show how control rights and information affect the division of risk bearing between managers and investors. Lack of transparency increases R2 by shifting firm-specific risk to managers. Opaque stocks with high R2s are also more likely to crash, that is, to deliver large negative returns. Using stock returns from 40 stock markets from 1990 to 2001, we find strong positive relations between R2 and several measures of opaqueness. These measures also explain the frequency of crashes.

Keywords: corporate control, international financial markets, firm-specific risks, information and market efficiency, crashes

JEL Classification: G12, G14, G15, G38, N20

Suggested Citation

Myers, Stewart C. and Jin, Li, R-Squared Around the World: New Theory and New Tests. Journal of Financial Economics, Forthcoming. Available at SSRN: https://ssrn.com/abstract=870582

Stewart C. Myers

Massachusetts Institute of Technology (MIT) ( email )

Sloan School of Management
Cambridge, MA 02142
United States
617-253-6696 (Phone)
617-258-6855 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Li Jin (Contact Author)

Harvard Business School - Finance Unit ( email )

Boston, MA 02163
United States
617-495-5590 (Phone)
617-496-5271 (Fax)

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