Revisiting Roll’s R2 Puzzle (with Brent Kitchens and Chris Yung)

Abstrac: We resolve Roll’s R2 puzzle. Before legislation enacted to prevent such practices, information leakage through selective disclosure could be incorporated into market prices prior to public release of news. I.e., “news days” did not deliver news to the stock market. Now they do. We show changes in return R2 and turnover R2 behavior around the passage of legislation barring selective disclosure practices in the US and in the EU, and document lack of such changes in Australia and Japan, which did not implement similar measures. We further show that certain types of news, such as positive events and news released near weekends, were more likely to leak prior to this legislation. Roll’s R2 puzzle no longer holds, but only for locales that implemented selective disclosure directives.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3517521