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Earnings Volatility, Cash Flow Volatility, and Informed Trading

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  • SUDARSHAN JAYARAMAN

Abstract

I examine whether earnings that are smoother or more volatile than cash flows provide or garble information. Consistent with theories that predict more informed trading when public information is less informative, I find that bid‐ask spreads and the probability of informed trading are higher both when earnings are smoother than cash flows and also when earnings are more volatile than cash flows. Additional tests suggest that managers' discretionary choices that lead to smoother or more volatile earnings than cash flows garble information, on average. However, I find that informed trading is attenuated in settings in which theory suggests that discretionary smoothing or volatizing of earnings is likely to be informative.

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  • Sudarshan Jayaraman, 2008. "Earnings Volatility, Cash Flow Volatility, and Informed Trading," Journal of Accounting Research, Wiley Blackwell, vol. 46(4), pages 809-851, September.
    • Handle: RePEc:bla:joares:v:46:y:2008:i:4:p:809-851
    DOI: 10.1111/j.1475-679X.2008.00293.x
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