The Implications of Low R 2: Evidence from China

Conghui Hu and Shasha Liu

Emerging Markets Finance and Trade, 2013, vol. 49, issue 1, 17-32

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.

Keywords: China; information efficiency; momentum; noise; stock market (search for similar items in EconPapers)
Date: 2013
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