Abstract Morck, Yeung and Yu show that R 2 is higher in countries with less developed financial systems and poorer corporate governance. We show how control rights and information affect the division of risk bearing between managers and investors. Lack of transparency increases R 2 by shifting firm-specific risk to managers. Opaque stocks with high R 2s are also more likely to crash, that is, to deliver large negative returns. Using stock returns from 40 stock markets from 1990 to 2001, we find strong positive relations between R 2 and several measures of opaqueness. These measures also explain the frequency of crashes.