tailieunhanh - DOES GREATER FIRM-SPECIFIC RETURN VARIATION MEAN MORE OR LESS INFORMED STOCK PRICING?

However, an alternative interpretation might suggest that the size of the effect is far from trivial. Consider a large, risky project – let us choose as an example the Saturn project undertaken by General Motors some time ago. How much does such a project change the volatility of a firm’s returns? The answer depends on many factors, such as the market’s view of to what extent the success of the project is a signal of the firm’s future growth prospects. But it is not likely we would expect such a project to change GM’s annual volatility from 30% to 50%. . | Journal of Accounting Research Vol. 41 No. 5 December 2003 Printed in . Does Greater Firm-Specific Return Variation Mean More or Less Informed Stock Pricing ARTYOM DURNEV RANDALL MORCK t BERNARD YEUNG Ị AND PAUL ZAROWIN Ị Received 23 May 2001 accepted 16July 2003 ABSTRACT Roll 1988 observes low R2 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 R2 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. 1. Introduction Stock markets perform a vital economic role by generating prices that serve as signals for resource allocation and investment decisions. This role has two parts if stock prices are near their fundamental full information values 1 capital is priced correctly in its different uses and 2 this information provides corporate managers with meaningful feedback as stock University of Miami fUniversity of Alberta fNewYork University. The authors are grateful for helpful comments from participants in the Accounting Seminar at the New York University Stern School of Business. Also we are most grateful for the very helpful comments from the editor Abbie Smith and the referee. Randall Morck s research is supported by the Social Sciences and Humanity Research Council. 797 Copyright University of Chicago on behalf of the Institute of Professional Accounting 2003 798 A. DURNEV R. MORCK B. YEUNG AND P. ZAROWIN prices change in response to their decisions. These two effects should lead to more economically