R2 and Idiosyncratic Risk Are Not Interchangeable

• 成果类型: Article
• 署名作者: Li, Bin; Rajgopal, Shivaram; Venkatachalam, Mohan
• 署名单位: University of Texas System; University of Texas Dallas; Emory University; Duke University
• 刊物名称: ACCOUNTING REVIEW
• ISSN/ISSBN: 0001-4826
• DOI: 10.2308/accr-50826
• 发表日期: 2014
• 页码: 2261-2295
• 关键词: firm-specific information; cross-section; Price informativeness; corporate governance; Investor sentiment; RETURN VOLATILITY; earnings quality; COSTLY ARBITRAGE; MARKET; accruals

摘要

A growing literature investigates the association between stock return variation and several aspects of information and governance structures, in both a cross-country setting and a cross-firm setting within the U.S. Papers use either idiosyncratic stock return volatility (sigma(2)(e)) or R-2 as interchangeable measures of firm-specific return variation but report inconsistent results. An important reason for the differing interpretations is the assumption about whether lower R-2 (or higher sigma(2)(e)) captures firm-specific news or noise. We document that higher sigma(2)(e) (or equivalently, lower R-2) resembles noise. In addition, we show, analytically and empirically, that different results obtain when using R-2 or sigma(2)(e) because the systematic risk inherent in the R-2 metric is also correlated with the independent variable of interest. Therefore, we recommend that when assessing the association between R-2 (or sigma(2)(e)) and some independent variable, researchers (1) control for elements of systematic risk and (2) triangulate their findings with other measures of information environment.