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The Implications of Low R 2 : Evidence from China

Author

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  • Conghui Hu
  • Shasha Liu

Abstract

Motivated by the recent debate on the implications of low R 2 in the U.S. market, we conjecture that lower R 2 is more likely to be associated with noise and low pricing efficiency because stock price tracks its fundamentals more loosely in a less efficient stock market such as China. We conclude that, first, there is no significant difference in information content among stocks with high and low R 2 . Second, both accruals anomaly and price momentum are much stronger among firms with lower R 2 . Moreover, the price momentum effect is much stronger among stocks with higher DIS , a new proxy constructed to provide a direct description of noise in stock price.

Suggested Citation

  • Conghui Hu & Shasha Liu, 2013. "The Implications of Low R 2 : Evidence from China," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 49(1), pages 17-32, January.
  • Handle: RePEc:mes:emfitr:v:49:y:2013:i:1:p:17-32
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    Citations

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    Cited by:

    1. Rapheedah Musneh & Mohd. Rahimie Abdul Karim & Caroline Geetha A/P Arokiadasan Baburaw, 2021. "Liquidity risk and stock returns: empirical evidence from industrial products and services sector in Bursa Malaysia," Future Business Journal, Springer, vol. 7(1), pages 1-10, December.
    2. Zhang, Wei & Li, Xiao & Shen, Dehua & Teglio, Andrea, 2016. "R2 and idiosyncratic volatility: Which captures the firm-specific return variation?," Economic Modelling, Elsevier, vol. 55(C), pages 298-304.
    3. Li, Bo & Liu, Zhenya & Teka, Hanen & Wang, Shixuan, 2023. "The evolvement of momentum effects in China: Evidence from functional data analysis," Research in International Business and Finance, Elsevier, vol. 64(C).

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