R-Square and Market Efficiency

50 Pages Posted: 29 Aug 2006 Last revised: 15 May 2011

See all articles by Siew Hong Teoh

Siew Hong Teoh

University of California, Irvine - Accounting Area

Yong George Yang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration

Yinglei Zhang

The Chinese University of Hong Kong (CUHK) - School of Accountancy

Date Written: July 30, 2009

Abstract

This paper addresses the debate about R-square as an indicator of information quality: Does low R-square indicate early resolution of uncertainty through the arrival of firm-specific information, or does it indicate a high level of uncertainty that remains unresolved? Tests based on the post-earnings-announcement drift, V/P, accruals, and net operating assets anomalies all reject the view that low R-square indicates a high quality information environment (early resolution of uncertainty). Low R-square firms have lower future earnings response coefficient, indicating that their current stock price incorporates a smaller amount of future earnings news, and thus more uncertainty about future earnings news remains unresolved. Furthermore, low R-square firms have worse information environment as measured by earnings quality, earnings persistence, and earnings predictability, and have higher probability of distress.

Keywords: R-square, idiosyncratic volatility, firm-specific information

JEL Classification: M41, G14

Suggested Citation

Teoh, Siew Hong and Yang, Yong George and Zhang, Yinglei, R-Square and Market Efficiency (July 30, 2009). Available at SSRN: https://ssrn.com/abstract=926948 or http://dx.doi.org/10.2139/ssrn.926948

Siew Hong Teoh (Contact Author)

University of California, Irvine - Accounting Area ( email )

Irvine, CA 92697-3125
United States

Yong George Yang

The Chinese University of Hong Kong (CUHK) - Faculty of Business Administration ( email )

Shatin, N.T.
Hong Kong

Yinglei Zhang

The Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )

Shatin, N.T.
Hong Kong

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