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The use of the R2 as a measure of firm-specific information: A cross-country critique

By Paulo Alves, Ken Peasnell and Paul Taylor

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 explanatio

Year: 2010
OAI identifier: oai:eprints.lancs.ac.uk:31324
Provided by: Lancaster E-Prints

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