EconPapers    
Economics at your fingertips  
 

Information Efficiency and Firm-Specific Return Variation

Patrick Kelly

No w0208, Working Papers from Center for Economic and Financial Research (CEFIR)

Abstract: Reasoning that private firm-specific information causes firm-specific return variation that drives down market-model R2s, Morck, Yeung, and Yu (2000) begin a large body of research which interprets R2 as an inverse measure of price informativeness. Low R2s or “synchronicity,” as it is called in this literature, signal that prices more efficiently incorporate private firm-specific information, and high R2s indicate less. For this to be true, we would expect that low-R2 stocks have characteristics that facilitate private informed trade, i.e. lower information costs and fewer impediments to arbitrage. However, in this paper we document the opposite: Low-R2 stocks are small, young, and followed by few analysts, and have high bid-ask spreads, high price impact, greater short-sale constraints and are infrequently traded. In fact, microstructure measures suggest that private-information events are less likely for low-R2 stocks than high, and that differences in R2 are driven as much by firm-specific volatility on days without private news as by firm-specific volatility on days with private news. These results call into question prior research using R2 to measure the information content of stock prices.

Pages: 54 pages
Date: 2014-09
New Economics Papers: this item is included in nep-cta and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (86)

Downloads: (external link)
http://www.cefir.ru/papers/WP208.pdf (application/pdf)

Related works:
Journal Article: Information Efficiency and Firm-Specific Return Variation (2014) Downloads
Working Paper: Information Efficiency and Firm-Specific Return Variation (2014) Downloads
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cfr:cefirw:w0208

Access Statistics for this paper

More papers in Working Papers from Center for Economic and Financial Research (CEFIR) Contact information at EDIRC.
Bibliographic data for series maintained by Julia Babich ().

 
Page updated 2025-03-30
Handle: RePEc:cfr:cefirw:w0208