The Implications of Low <i>R</i>²: Evidence from China

Motivated by the recent debate on the implications of low <i>R</i>² in the U.S. market, we conjecture that lower <i>R</i>² is more likely to be associated with noise and low pricing efficiency because stock price tracks its fundamentals more loosely in a less efficient stock market such as China. We conclude that, first, there is no significant difference in information content among stocks with high and low <i>R</i>². Second, both accruals anomaly and price momentum are much stronger among firms with lower <i>R</i>². Moreover, the price momentum effect is much stronger among stocks with higher <i>DIS</i>, a new proxy constructed to provide a direct description of noise in stock price.