THE "FIRM-SPECIFIC RETURN VARIATION": A MEASURE OF PRICE INFORMATIVENESS OR INFORMATION ASYMMETRY?

This paper investigates the relevancy of the "Firm-Specific Return Variation" (FSRV) as a measure of stock price informativeness. For this purpose, we study the link between FSRV and stock excess returns on the American market over the period 1986–2001. After controlling for size effects, we find a negative and highly significant impact of FSRV on stock returns. The link between FSRV and stock excess returns is robust to asset pricing models and does not capture systematic, size or "book-to-market" (BM) effects. Based on rational expectations equilibrium (REE) models considering asymmetrically informed investors, we suggest that FSRV is a good proxy for price informativeness. Common stocks with higher specific return variation have lower information-risk premium, thus lower expected returns.