Financial reporting quality and idiosyncratic return volatility
Campbell et al. (2001) document that firms’ stock returns have become more volatile in the U.S. since 1960. We hypothesize and find that deteriorating earnings quality is associated with higher idiosyncratic return volatility over 1962–2001. These results are robust to controlling for (i) inter-temporal changes in the disclosure of value-relevant information, sophistication of investors and the possibility that earnings quality can be informative about future cash flows; (ii) stock return performance, cash flow operating performance, cash flow variability, growth, leverage and firm size; and (iii) new listings, high-technology firms, firm-years with losses, mergers and acquisitions and financial distress.
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