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Does Greater Firm‐Specific Return Variation Mean More or Less Informed Stock Pricing?
Author(s) -
Durnev Artyom,
Morck Randall,
Yeung Bernard,
Zarowin Paul
Publication year - 2003
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1046/j.1475-679x.2003.00124.x
Subject(s) - capital asset pricing model , stock (firearms) , earnings , private information retrieval , economics , econometrics , financial economics , rate of return , expected return , public information , business , monetary economics , finance , statistics , mechanical engineering , portfolio , mathematics , public administration , political science , engineering
Roll [1988] observes low R 2 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 R 2 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.