An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

George Allayannis
University of Virginia

Brian Rountree
Rice University

James Weston
Rice University

Abstract: This paper presents empirical evidence that cash flow volatility is inversely related to firm value. The magnitude of the effect is substantial with a one percent increase in cash flow volatility resulting in approximately a 0.32 percent decrease in firm value. However, we do not find an increase in firm value associated with earnings smoothing resulting from managers’ accrual estimates. Our results are consistent with risk management theory and suggest that managers' efforts to produce smooth earnings add value to the firm, but only via the cash component of earnings.

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