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A Temporal Analysis of Earnings Volatility, its Determinants, and Earnings Relevance
Changling Chen, University of Waterloo
Alan (Guoming) Huang, University of Waterloo
Ranjini Jha, University of Waterloo
ABSTRACT. We show that the increase in the total volatility of firm earnings is mainly caused by increasing operating volatility and reflects changes in firms’ fundamentals. These findings are supported in cross-sectional and times-series tests and are robust to new firm and industry effects. Accrual accounting and earnings management help reduce earnings volatility but fail to fully offset the volatility from economic activities. We also find that the decreasing earnings relevance documented e.g., in Lev and Zarowin (1999) is related to increasing earnings volatility.
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