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The predictive qualities of earnings volatility and earnings uncertainty

Author

Listed:
  • Dain C. Donelson

    (University of Texas at Austin)

  • Robert J. Resutek

    (University of Georgia)

Abstract

This study examines the differential predictive power of past earnings volatility for analyst forecast errors and future returns. Past earnings volatility jointly captures two correlated, but distinct, earnings properties: time-series earnings variation and uncertainty in future earnings. To distinguish between these two earnings properties, we develop a forward-looking measure of earnings uncertainty that has a minimal mechanical link to variation in prior-period earnings realizations and does not rely on analyst forecasts. Our results suggest that future earnings uncertainty, and not time variation in earnings, is associated with overly optimistic future earnings expectations of equity analysts and investors. We provide the first empirical evidence on the relevance of future earnings uncertainty to analysts and investors over 1-year horizons. In addition, we provide empirical evidence showing that forecast dispersion is a poor measure of earnings uncertainty.

Suggested Citation

  • Dain C. Donelson & Robert J. Resutek, 2015. "The predictive qualities of earnings volatility and earnings uncertainty," Review of Accounting Studies, Springer, vol. 20(1), pages 470-500, March.
    • Handle: RePEc:spr:reaccs:v:20:y:2015:i:1:d:10.1007_s11142-014-9308-5
    DOI: 10.1007/s11142-014-9308-5
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    Keywords

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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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