Earnings volatility and earnings prediction: analysis and UK evidence

TY - JOUR

T1 - Earnings volatility and earnings prediction: analysis and UK evidence

AU - Clubb, Colin

AU - Wu, Guoli

PY - 2013

Y1 - 2013

N2 - This paper confirms that US evidence of a negative relationship between earnings persistence and earnings volatility applies to UK firms over 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 true persistence.

AB - This paper confirms that US evidence of a negative relationship between earnings persistence and earnings volatility applies to UK firms over 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 true persistence.

U2 - 10.1111/jbfa.12055

DO - 10.1111/jbfa.12055

M3 - Article

SN - 0306-686X

VL - N/A

SP - N/A

JO - Journal of Business Finance & Accounting

JF - Journal of Business Finance & Accounting

ER -