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Do investors value smooth performance?

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  • Rountree, Brian
  • Weston, James P.
  • Allayannis, George
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    Abstract

    This paper presents empirical evidence that cash-flow volatility is negatively valued by investors. The magnitude of the effect is substantial with a 1% increase in cash-flow volatility, resulting in approximately a 0.15% decrease in firm value. We show that this increase, however, is not associated with earnings smoothing resulting from managers' accrual estimates. Our results are consistent with a preference by the market for less volatile cash flows and suggest that managers' efforts to produce smooth financial statements add value, but only via the cash component of earnings.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Financial Economics.

    Volume (Year): 90 (2008)
    Issue (Month): 3 (December)
    Pages: 237-251

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    Handle: RePEc:eee:jfinec:v:90:y:2008:i:3:p:237-251

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    Web page: http://www.elsevier.com/locate/inca/505576

    Related research

    Keywords: Cash-flow volatility Earnings smoothing Risk-management;

    References

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    Cited by:
    1. Li, Yan & Yang, Liyan, 2013. "Prospect theory, the disposition effect, and asset prices," Journal of Financial Economics, Elsevier, vol. 107(3), pages 715-739.
    2. Ben Ammar, Semir & Eling, Martin, 2013. "Common Risk Factors of Infrastructure Firms," Working Papers on Finance 1307, University of St. Gallen, School of Finance.
    3. Bitsch, Florian, 2012. "Do investors value cash flow stability of listed infrastructure funds?," CEFS Working Paper Series 2012-01, Center for Entrepreneurial and Financial Studies (CEFS), Technische Universität München.
    4. :Sohnke Bartram & Gregory Brown & Jennifer S. Conrad, 2009. "The Effects of Derivatives on Firm Risk Value," Working Papers wpn09-01, Warwick Business School, Finance Group.
    5. Anh Duc Ngo & Oscar Varela, 2012. "Earnings smoothing and the underpricing of seasoned equity offerings," Managerial Finance, Emerald Group Publishing, vol. 38(9), pages 833-859, September.

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