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Idiosyncratic Volatility and Earnings Quality: Evidence from United Kingdom

Author

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  • Ana Isabel Ramos Domingues

    (FEP-UP, School of Economics and Management, University of Porto)

  • António de Melo da Costa Cerqueira

    (FEP-UP, School of Economics and Management, University of Porto)

  • Elísio Fernando Moreira Brandão

    (FEP-UP, School of Economics and Management, University of Porto)

Abstract

Recently, the idiosyncratic volatility has captured much of the attention of the financial literature, being the idiosyncratic volatility puzzle one of the most studied. Our study aims to verify if the financial reporting quality, proxied by earnings quality, an accrual-based measure, has an impact on idiosyncratic return volatility, using as sample the firms listed on London Stock Exchange, and comprising the period between 1988 and 2015. To account for the robustness of our results, we used several control variables, such as leverage, size, ratio book-to-market, firm age and firm performance. We conclude that earnings quality has a positive impact on idiosyncratic volatility, meaning that poorer information quality implies higher idiosyncratic volatility. Posteriorly, we extend our study to a trend analysis, asking if the earnings quality behaviour is related with the idiosyncratic volatility trends. We prove that idiosyncratic volatility does not have a constant upward trend, instead it behaves like ebbs and flows. We found that earnings quality has an impact, albeit small, in the overall trend of idiosyncratic volatility, and also explains its episodic behaviour.

Suggested Citation

  • Ana Isabel Ramos Domingues & António de Melo da Costa Cerqueira & Elísio Fernando Moreira Brandão, 2016. "Idiosyncratic Volatility and Earnings Quality: Evidence from United Kingdom," FEP Working Papers 579, Universidade do Porto, Faculdade de Economia do Porto.
    • Handle: RePEc:por:fepwps:579
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    More about this item

    Keywords

    Idiosyncratic Volatility; Earnings Quality; Abnormal Accruals; Time Series Analysis;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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