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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. 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.
    2. 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.
    3. Ben Ammar, Semir & Eling, Martin, 2013. "Common Risk Factors of Infrastructure Firms," Working Papers on Finance 1307, University of St. Gallen, School of Finance.
    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. Li, Yan & Yang, Liyan, 2013. "Prospect theory, the disposition effect, and asset prices," Journal of Financial Economics, Elsevier, vol. 107(3), pages 715-739.
    6. Zheng Wang, 2014. "Measuring investors’ assessment of earnings persistence: do investors see through smoothed earnings?," Review of Quantitative Finance and Accounting, Springer, vol. 42(4), pages 691-708, May.

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