Abstract: | 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. |