IDEAS home Printed from https://ideas.repec.org/a/eee/jaecon/v47y2009i1-2p160-181.html
   My bibliography  Save this article

Earnings volatility and earnings predictability*

* This paper has been replicated

Author

Listed:
  • Dichev, Ilia D.
  • Tang, Vicki Wei

Abstract

Survey evidence indicates widely held managerial beliefs that earnings volatility is negatively related to earnings predictability. In addition, existing research suggests that earnings volatility is determined by economic and accounting factors, and both of these factors reduce earnings predictability. We find that the consideration of earnings volatility brings substantial improvements in the prediction of both short- and long-term earnings. Conditioning on volatility information also allows one to identify systematic errors in analyst forecasts, which implies that analysts do not fully understand the implications of earnings volatility for earnings predictability.

Suggested Citation

  • Dichev, Ilia D. & Tang, Vicki Wei, 2009. "Earnings volatility and earnings predictability," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 160-181, March.
    • Handle: RePEc:eee:jaecon:v:47:y:2009:i:1-2:p:160-181
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0165-4101(08)00057-8
    Download Restriction: Full text for ScienceDirect subscribers only
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Brown, Lawrence D., 1993. "Earnings forecasting research: its implications for capital markets research," International Journal of Forecasting, Elsevier, vol. 9(3), pages 295-320, November.
    2. Frankel, Richard & Lee, Charles M. C., 1998. "Accounting valuation, market expectation, and cross-sectional stock returns," Journal of Accounting and Economics, Elsevier, vol. 25(3), pages 283-319, June.
    3. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
    4. Lev, B & Thiagarajan, Sr, 1993. "Fundamental Information Analysis," Journal of Accounting Research, Wiley Blackwell, vol. 31(2), pages 190-215.
    5. Abarbanell, Jeffrey S & Bernard, Victor L, 1992. "Tests of Analysts' Overreaction/Underreaction to Earnings Information as an Explanation for Anomalous Stock Price Behavior," Journal of Finance, American Finance Association, vol. 47(3), pages 1181-1207, July.
    6. Collins, Daniel W. & Maydew, Edward L. & Weiss, Ira S., 1997. "Changes in the value-relevance of earnings and book values over the past forty years," Journal of Accounting and Economics, Elsevier, vol. 24(1), pages 39-67, December.
    7. Brown, Lawrence D., 1993. "Reply to commentaries on "Earnings forecasting research: its implications for capital markets research"," International Journal of Forecasting, Elsevier, vol. 9(3), pages 343-344, November.
    8. Paul Hribar & Daniel W. Collins, 2002. "Errors in Estimating Accruals: Implications for Empirical Research," Journal of Accounting Research, Wiley Blackwell, vol. 40(1), pages 105-134, March.
    9. Abarbanell, JS & Bushee, BJ, 1997. "Fundamental analysis, future earnings, and stock prices," Journal of Accounting Research, Wiley Blackwell, vol. 35(1), pages 1-24.
    10. Givoly, Dan & Hayn, Carla, 2000. "The changing time-series properties of earnings, cash flows and accruals: Has financial reporting become more conservative?," Journal of Accounting and Economics, Elsevier, vol. 29(3), pages 287-320, June.
    11. Abarbanell, Jeffery & Lehavy, Reuven, 2003. "Biased forecasts or biased earnings? The role of reported earnings in explaining apparent bias and over/underreaction in analysts' earnings forecasts," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 105-146, December.
    12. Brown, Philip, 1993. "Comments on 'Earnings forecasting research: its implications for capital markets research' by L. Brown," International Journal of Forecasting, Elsevier, vol. 9(3), pages 331-335, November.
    13. Finger, Ca, 1994. "The Ability Of Earnings To Predict Future Earnings And Cash Flow," Journal of Accounting Research, Wiley Blackwell, vol. 32(2), pages 210-223.
    14. Freeman, Rn & Ohlson, Ja & Penman, Sh, 1982. "Book Rate-Of-Return And Prediction Of Earnings Changes - An Empirical-Investigation," Journal of Accounting Research, Wiley Blackwell, vol. 20(2), pages 639-653.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2008. "The financial analyst forecasting literature: A taxonomy with suggestions for further research," International Journal of Forecasting, Elsevier, vol. 24(1), pages 34-75.
    2. Kothari, S. P., 2001. "Capital markets research in accounting," Journal of Accounting and Economics, Elsevier, vol. 31(1-3), pages 105-231, September.
    3. Brown, Lawrence D. & Zhou, Ling, 2015. "Interactions between analysts’ and managers’ earnings forecasts," International Journal of Forecasting, Elsevier, vol. 31(2), pages 501-514.
    4. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    5. Myungsun Kim & William Kross, 2005. "The Ability of Earnings to Predict Future Operating Cash Flows Has Been Increasing—Not Decreasing," Journal of Accounting Research, Wiley Blackwell, vol. 43(5), pages 753-780, December.
    6. Lambert, David & Matolcsy, Zoltan & Wyatt, Anne, 2015. "Analysts' earnings forecasts and technological conditions in the firm's investment environment," Journal of Contemporary Accounting and Economics, Elsevier, vol. 11(2), pages 104-120.
    7. van Lent, L.A.G.M., 1999. "Incomplete contracting theory in empirical accounting research," Other publications TiSEM 088f797d-9fa4-4081-98f4-1, Tilburg University, School of Economics and Management.
    8. Po‐Chang Chen & Ganapathi S. Narayanamoorthy & Theodore Sougiannis & Hui Zhou, 2020. "Analyst underreaction and the post‐forecast revision drift," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(9-10), pages 1151-1181, October.
    9. Patricia M. Fairfield & Sundaresh Ramnath & Teri Lombardi Yohn, 2009. "Do Industry‐Level Analyses Improve Forecasts of Financial Performance?," Journal of Accounting Research, Wiley Blackwell, vol. 47(1), pages 147-178, March.
    10. Sean Shun Cao & Ganapathi S. Narayanamoorthy, 2012. "Earnings Volatility, Post–Earnings Announcement Drift, and Trading Frictions," Journal of Accounting Research, Wiley Blackwell, vol. 50(1), pages 41-74, March.
    11. Ramnath, Sundaresh & Rock, Steve & Shane, Philip, 2005. "Value Line and I/B/E/S earnings forecasts," International Journal of Forecasting, Elsevier, vol. 21(1), pages 185-198.
    12. Sam Han & Justin Yiqiang Jin & Tony Kang & Gerald Lobo, 2014. "Managerial Ownership and Financial Analysts’ Information Environment," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(3-4), pages 328-362, April.
    13. Ruei-Shian Wu & Hsiou-wei W. Lin, 2014. "Security analysts' incentive and cognitive processing bias: evidence from analysts' recommendations," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 21(4), pages 443-471, December.
    14. Naresh Bansal & Jack Strauss & Alireza Nasseh, 2015. "Can we consistently forecast a firm’s earnings? Using combination forecast methods to predict the EPS of Dow firms," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 39(1), pages 1-22, January.
    15. Young†Soo Choi & John F. O'Hanlon & Peter F. Pope, 2006. "Conservative Accounting and Linear Information Valuation Models," Contemporary Accounting Research, John Wiley & Sons, vol. 23(1), pages 73-101, March.
    16. Hou, Kewei & van Dijk, Mathijs A. & Zhang, Yinglei, 2012. "The implied cost of capital: A new approach," Journal of Accounting and Economics, Elsevier, vol. 53(3), pages 504-526.
    17. Alexander P. Paton & Damien Cannavan & Stephen Gray & Khoa Hoang, 2020. "Analyst versus model‐based earnings forecasts: implied cost of capital applications," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 4061-4092, December.
    18. Chang, Chu-Hsuan & Lin, Hsiou-Wei William, 2018. "Does there prevail momentum in earnings management for seasoned equity offering firms?," International Review of Economics & Finance, Elsevier, vol. 55(C), pages 111-129.
    19. Raul Iñiguez & Francisco Poveda & Pablo J. Vazquez, 2010. "Valuing Loss Firms: What Can Be Learned From Analysts' Forecasts?," Abacus, Accounting Foundation, University of Sydney, vol. 46(2), pages 129-152, June.
    20. Clatworthy, Mark A. & Peel, David A. & Pope, Peter F., 2007. "Evaluating the properties of analysts’ forecasts: A bootstrap approach," The British Accounting Review, Elsevier, vol. 39(1), pages 3-13.

    Replication

    This item has been replicated by:
  • Frankel, Richard & Litov, Lubomir, 2009. "Earnings persistence," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 182-190, March.

    • Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:jaecon:v:47:y:2009:i:1-2:p:160-181. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jae .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.