Does greater firm-specific return variation mean more or less informed stock pricing?

Roll [1988] observes low R 2 statistics for common asset pricing models due to vigorous firm-specific return variation not associated with public information. He concludes that this implies "either private information or else occasional frenzy unrelated to concrete information" [p. 56]. We show that firms and industries with lower market model R 2 statistics exhibit higher association between current returns and future earnings, indicating more information about future earnings in current stock returns. This supports Roll's first interpretation: higher firm-specific return variation as a fraction of total variation signals more information-laden stock prices and, therefore, more efficient stock markets.