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

Does Greater Firm‐Specific Return Variation Mean More or Less Informed Stock Pricing? ABSTRACT Roll (1988) observes low R2 statistics for common asset pricing models due to vigorous firm‐specific return variation not associated with public information. He concludes that this implies “either private information or else occasional frenzy unrelated to concrete information”(p. 56). 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 firm‐specific return variation as a fraction of total variation signals more information‐laden stock prices and, therefore, more efficient stock markets. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting Research Wiley

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

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References (23)

Publisher
Wiley
Copyright
Copyright © 2003 Wiley Subscription Services, Inc., A Wiley Company
ISSN
0021-8456
eISSN
1475-679X
DOI
10.1046/j.1475-679X.2003.00124.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT Roll (1988) observes low R2 statistics for common asset pricing models due to vigorous firm‐specific return variation not associated with public information. He concludes that this implies “either private information or else occasional frenzy unrelated to concrete information”(p. 56). 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 firm‐specific return variation as a fraction of total variation signals more information‐laden stock prices and, therefore, more efficient stock markets.

Journal

Journal of Accounting ResearchWiley

Published: Dec 1, 2003

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