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The Higher Moments of Future Earnings

Author

Listed:
  • Woo-Jin Chang

    (HEC Paris - Ecole des Hautes Etudes Commerciales)

  • Steven J. Monahan

    (University of Utah)

  • Amine Ouazad

    (HEC Montréal - HEC Montréal)

  • Florin Vasvari

    (London Business School)

Abstract

"We evaluate whether reported accounting numbers are informative about earnings uncertainty and whether earnings uncertainty is priced. We use quantile regressions to forecast the standard deviation, skewness, and kurtosis of future earnings. These three moments are important measures of earnings uncertainty because they reflect the size of the average deviation from expected earnings and the amount of extreme upside potential, extreme downside risk, or both. We develop a novel approach for evaluating the reliability of our forecasts and we show that they are reliable. We also document that: (1) equity prices are increasing (decreasing) in the standard deviation and skewness (kurtosis) of lead return on equity and (2) credit spreads are increasing (decreasing) in the standard deviation and kurtosis (skewness) of lead return on assets. Our results indicate that historical financial statements are informative about earnings uncertainty and that earnings uncertainty is priced."

Suggested Citation

  • Woo-Jin Chang & Steven J. Monahan & Amine Ouazad & Florin Vasvari, 2021. "The Higher Moments of Future Earnings," Post-Print hal-05677529, HAL.
    • Handle: RePEc:hal:journl:hal-05677529
    DOI: 10.2308/TAR-2015-0413
    as

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