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R 2 and the Economy

Author

Listed:
  • Randall Morck

    (Department of Finance and Statistical Analysis, Alberta School of Business, University of Alberta, Edmonton, Alberta, Canada T6E 2R6
    National Bureau of Economic Research, Cambridge, Massachusetts 02138)

  • Bernard Yeung

    (Department of Finance and Strategic Management, Business School, National University of Singapore, Singapore 119245)

  • Wayne Yu

    (School of Accounting and Finance, Hong Kong Polytechnic University, Hung Hom, Kowloon, Hong Kong)

Abstract

The characterization of firm-specific return volatility as the intensity with which firm-specific events occur reconciles many seemingly discordant results. A functionally efficient stock market allocates capital to its highest value uses, which often amounts to financing Schumpeterian creative destruction, wherein creative winner firms outpace destroyed losers, who could be the previous year’s winners. This rise in firm-specific fundamentals volatility elevates firm-specific return volatility in a sufficiently informationally efficient stock market. These linkages are interconnected feedback loops rather than unidirectional chains of causality.

Suggested Citation

  • Randall Morck & Bernard Yeung & Wayne Yu, 2013. "R 2 and the Economy," Annual Review of Financial Economics, Annual Reviews, vol. 5(1), pages 143-166, November.
    • Handle: RePEc:anr:refeco:v:5:y:2013:p:143-166
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    File URL: http://www.annualreviews.org/doi/abs/10.1146/annurev-financial-110112-120936
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    Citations

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    Cited by:

    1. David, Joel M. & Simonovska, Ina, 2016. "Correlated beliefs, returns, and stock market volatility," Journal of International Economics, Elsevier, vol. 99(S1), pages 58-77.
    2. Bernard Bollen & Michael Skully & David Tripe & Xiaoting Wei, 2015. "The Global Financial Crisis and Its Impact on Australian Bank Risk," International Review of Finance, International Review of Finance Ltd., vol. 15(1), pages 89-111, March.

    More about this item

    Keywords

    stock returns comovement; synchronicity; market efficiency; creative destruction; economic development;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • O1 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development
    • O3 - Economic Development, Innovation, Technological Change, and Growth - - Innovation; Research and Development; Technological Change; Intellectual Property Rights

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