Asia-Pacific Journal of Business (아태비즈니스연구)

KNU The Institute of Management & Economy Research (강원대학교 경영경제연구소)
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The effect of earnings volatility on current stock price informativeness about expectations of future earnings

이익 변동성이 현재 주가의 미래 이익 기대에 대한 정보성에 미치는 영향: 미국기업을 중심으로

  • Joong-Seok Cho (School of Business Administration, Hanyang University)
  • Received : 2022.11.30
  • Accepted : 2022.12.23
  • Published : 2022.12.30
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Abstract

Purpose - This study investigates how earnings volatility influences current stock price informativeness about expectations of future earnings. Design/methodology/approach - I adopt the FERC model developed by Collins et al. (1994) and modified by Lundholm and Myers (2002) to investigate the connection between earnings volatility and future earnings reflected in current returns. I define five-year rolling standard deviations of earnings and components as earnings volatility measures and the degree of deviation of earnings from cash flows over the same five-year, which is developed by Jayaraman (2008). Finding - My results show that earnings volatility delays current stock price response to future operation expectations. They also verify that as earnings are more divergent from cash flows, current returns are less timely incorporating value-relevant future operation. Research implications or Originality This study shows that when volatile earnings deliver obscure and unreliable information about future operation expectations, they cause the market to be conflicting in understandings their implications and make it difficult in attaining correct future cashflow estimates.

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