Understanding Stock Price Volatility: The Role of Earnings
AbstractIn an efficient capital market, asset prices vary when investors change their expectations about cash flows, discount rates, or both. Using dividends to measure cash flows, previous research shows that the aggregate dividend-price ratio varies due to changes in expected discount rates (returns) rather than expected cash flows. In contrast, using accounting earnings instead of dividends as a measure of cash flows, this paper shows that as much as 70% of the variation in the dividend-price ratio can be explained by changes in expected earnings. Moreover, the paper documents a significant negative correlation between expected returns and expected earnings, suggesting that variations in a common factor to both may generate significant price volatility. The results are consistent with the dividend-policy irrelevance hypothesis. Copyright University of Chicago on behalf of the Institute of Professional Accounting, 2007.
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Bibliographic InfoArticle provided by Wiley Blackwell in its journal Journal of Accounting Research.
Volume (Year): 45 (2007)
Issue (Month): 1 (03)
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Web page: http://www.blackwellpublishing.com/journal.asp?ref=0021-8456
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- Hirshleifer, David & Hou, Kewei & Teoh, Siew Hong, 2007. "Accruals and Aggregate Stock Market Returns," MPRA Paper 5197, University Library of Munich, Germany.
- Cenesizoglu, Tolga, 2011. "Size, book-to-market ratio and macroeconomic news," Journal of Empirical Finance, Elsevier, vol. 18(2), pages 248-270, March.
- Hirshleifer, David & Hou, Kewei & Teoh, Siew Hong, 2009. "Accruals, cash flows, and aggregate stock returns," Journal of Financial Economics, Elsevier, vol. 91(3), pages 389-406, March.
- Sadka, Gil & Sadka, Ronnie, 2009. "Predictability and the earnings-returns relation," Journal of Financial Economics, Elsevier, vol. 94(1), pages 87-106, October.
- Jorgensen, Bjorn & Li, Jing & Sadka, Gil, 2012. "Earnings dispersion and aggregate stock returns," Journal of Accounting and Economics, Elsevier, vol. 53(1), pages 1-20.
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