R2: Does it Matter for Firm Valuation?
Article first published online: 6 APR 2011
© 2011, The Eastern Finance Association
Volume 46, Issue 2, pages 233–250, May 2011
How to Cite
Stowe, J. D. and Xing, X. (2011), R2: Does it Matter for Firm Valuation?. Financial Review, 46: 233–250. doi: 10.1111/j.1540-6288.2011.00298.x
- Issue published online: 6 APR 2011
- Article first published online: 6 APR 2011
- Tobin’s Q;
- stock price synchronicity;
- firm value;
A considerable amount of research has been devoted to why R2 differs across firms or markets, but little attention has been paid to the consequences of this difference. We fill this gap by investigating how differing R2 affects investors’ assessment of firm value. Using a sample of 90,111 firm-year observations from 1970 to 2004, we find that higher R2 leads to higher firm valuation and that, on average, high-R2 firms experience significant underperformance in the long run. These results suggest that high-R2 firms tend to be overpriced.