NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Wayne Yu

School of Accounting and Finance
Hong Kong Polytechnic University
Hung Hom, Kowloon, Hong Kong

E-Mail: afwyu@polyu.edu.hk

NBER Working Papers and Publications

May 2013R-squared and the Economy
with Randall Morck, Bernard Yeung: w19017
Many seemingly discordant results are reconciled if firm-specific return volatility is characterized as the intensity with which firm-specific events occur. A functionally efficient stock market allocates capital to its highest value uses, which often amounts to financing Schumpeterian creative destruction, wherein creative winner firms outpace destroyed losers, who can be last year's winners. This elevation in firm-specific fundamentals volatility elevates firm-specific return volatility in a sufficiently informationally efficient stock market. These linkages are interconnected feedback loops, rather than unidirectional chains of causality.
 
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