Alves, Paulo and Peasnell, Ken and Taylor, Paul (2010) The use of the R2 as a measure of firm-specific information: A cross-country critique. Journal of Business Finance and Accounting, 37 (1). pp. 1-26. ISSN 1468-5957
2009-08-19_Paper_JBFA_(final).pdf - Accepted Version
Download (863kB)
Abstract
Recent research uses the degree of stock returns co-movement as a measure of the quality of a country's information environment. It has been argued that stronger property rights, better corporate governance regimes and more efficient enforcement mechanisms lead to prices incorporating more firm-specific information and, therefore, co-moving less with the market. In this paper, we use a much more comprehensive international data set than in prior research, encompassing forty countries over twenty years, to evaluate the reliability of this approach in a cross-country setting and to analyse the behaviour of the measure used. Our results demonstrate severe limitations in the use of co-movement as a measure of information quality. We highlight the instability of the measure and show that it can produce results that are often difficult to reconcile with such an informational explanation