|
R-square: Noise or Price Efficiency
Siew Hong Teoh, University of California Irvine
Yong Yang, Chinese University of Hong Kong
Yinglei Zhang, Chinese University of Hong Kong
ABSTRACT. This paper examines the debate about R-square as an indicator of information quality: Does low R-square indicate high resolution of uncertainty through the arrival of firm-specific information, or does it indicate a high level of firm-specific uncertainty (noise)? Tests involving the accruals, net operating assets, post-earnings announcement drift, and V/P anomalies all reject the former high information resolution interpretation. An examination of the relation between R-square and the earnings response coefficient, which provides a direct test of the high-information interpretation, also favors the noise interpretation. Finally, the noise interpretation is further bolstered by results from several other tests relating the strength of firm fundamentals to R-square.
Full-Text is no longer available online. Please contact the author(s) for more information about this manuscript.
Back to Session Listing
|