Is Firm-specific Return Variation a Measure of Information Efficiency?

The issue of whether firm-specific return variation measures the private information reflected in stock returns or trading noise is controversial. Using a firm's geographic proximity to its investors as a proxy for a firm's private information, we investigate the relation between firm-specific return variation and price informativeness. We find that firms located in metropolitan areas experience higher firm-specific return variation and that holdings and trading by local institutional investors positively affect firm-specific return variation. These findings suggest that higher firm-specific return variation is indicative of more informative stock prices.