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Earnings Volatility and Earnings Prediction: Analysis and UK Evidence

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  • Colin Clubb
  • Guoli Wu

Abstract

This paper confirms that US evidence of a negative relationship between earnings persistence and earnings volatility applies to UK firms over the period 1991–2010. Our analytical framework highlights the possibility that this result may reflect downward estimation bias in earnings persistence (and persistence of cash flow and accruals components of earnings) related to transitory earnings elements. Out-of-sample forecasts, based on models estimated for earnings volatility quartiles, suggest significant improvement in earnings forecasts for lower volatility firms. The results also suggest that the negative association between earnings persistence and volatility may be due to both estimation bias and variation in core earnings persistence.

Suggested Citation

  • Colin Clubb & Guoli Wu, 2014. "Earnings Volatility and Earnings Prediction: Analysis and UK Evidence," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(1-2), pages 53-72, January.
    • Handle: RePEc:bla:jbfnac:v:41:y:2014:i:1-2:p:53-72
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    File URL: http://hdl.handle.net/10.1111/jbfa.12055
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    References listed on IDEAS

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    1. Richardson, Scott A. & Sloan, Richard G. & Soliman, Mark T. & Tuna, Irem, 2005. "Accrual reliability, earnings persistence and stock prices," Journal of Accounting and Economics, Elsevier, vol. 39(3), pages 437-485, September.
    2. Dechow, Patricia & Ge, Weili & Schrand, Catherine, 2010. "Understanding earnings quality: A review of the proxies, their determinants and their consequences," Journal of Accounting and Economics, Elsevier, vol. 50(2-3), pages 344-401, December.
    3. Frankel, Richard & Litov, Lubomir, 2009. "Earnings persistence," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 182-190, March.
    4. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, vol. 40(1-3), pages 3-73, December.
    5. Ali Al-Attar & Simon Hussain, 2004. "Corporate Data and Future Cash Flows," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 31(7-8), pages 861-903.
    6. Nelson, Karen K. & Barth, Mary E. & Cram, Donald, 2001. "Accruals and the Prediction of Future Cash Flows," Research Papers 1594r, Stanford University, Graduate School of Business.
    7. Dichev, Ilia D. & Tang, Vicki Wei, 2009. "Earnings volatility and earnings predictability," Journal of Accounting and Economics, Elsevier, vol. 47(1-2), pages 160-181, March.
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    Cited by:

    1. Kimouche Bilal, 2021. "Persistence and Predictive Ability of Earnings: Evidence from France and the UK," Economics and Business, Sciendo, vol. 35(1), pages 190-200, January.

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