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Earnings volatility and earnings predictability

Author

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  • Dichev, Ilia D.
  • Tang, Vicki Wei

Abstract

Survey evidence indicates widely held managerial beliefs that earnings volatility is negatively related to earnings predictability. In addition, existing research suggests that earnings volatility is determined by economic and accounting factors, and both of these factors reduce earnings predictability. We find that the consideration of earnings volatility brings substantial improvements in the prediction of both short- and long-term earnings. Conditioning on volatility information also allows one to identify systematic errors in analyst forecasts, which implies that analysts do not fully understand the implications of earnings volatility for earnings predictability.

Suggested Citation

  • 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.
  • Handle: RePEc:eee:jaecon:v:47:y:2009:i:1-2:p:160-181
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    References listed on IDEAS

    as
    1. Brown, Lawrence D., 1993. "Earnings forecasting research: its implications for capital markets research," International Journal of Forecasting, Elsevier, vol. 9(3), pages 295-320, November.
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    3. Brown, Lawrence D., 1993. "Reply to commentaries on "Earnings forecasting research: its implications for capital markets research"," International Journal of Forecasting, Elsevier, vol. 9(3), pages 343-344, November.
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    8. Givoly, Dan & Hayn, Carla, 2000. "The changing time-series properties of earnings, cash flows and accruals: Has financial reporting become more conservative?," Journal of Accounting and Economics, Elsevier, pages 287-320.
    9. Brown, Philip, 1993. "Comments on 'Earnings forecasting research: its implications for capital markets research' by L. Brown," International Journal of Forecasting, Elsevier, vol. 9(3), pages 331-335, November.
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    11. Graham, John R. & Harvey, Campbell R. & Rajgopal, Shiva, 2005. "The economic implications of corporate financial reporting," Journal of Accounting and Economics, Elsevier, pages 3-73.
    12. Collins, Daniel W. & Maydew, Edward L. & Weiss, Ira S., 1997. "Changes in the value-relevance of earnings and book values over the past forty years," Journal of Accounting and Economics, Elsevier, pages 39-67.
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