Does Greater Firm-Specific Return Variation Mean More or Less Informed Stock Pricing?
Roll  observes low "R"-super-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"-super-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. Copyright 2003 Institute of Professional Accounting, University of Chicago.
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Volume (Year): 41 (2003)
Issue (Month): 5 (December)
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