Do Investors Value Smooth Performance?
45 Pages Posted: 12 Mar 2008
Abstract
This paper presents empirical evidence that cash-flow volatility is negatively valued by investors. The magnitude of the effect is substantial with a 1% increase in cash-flow volatility, resulting in approximately a 0.15% decrease in firm value. We show that this increase, however, is not associated with earnings - smoothing resulting from managers' accrual estimates. Our results are consistent with a preference by the market for less volatile cash flows and suggest that managers' efforts to produce smooth financial statements add value, but only via the cash component of earnings.
Keywords: Cash flow volatility, earnings smoothing, risk management
JEL Classification: G12, M41, M44
Suggested Citation: Suggested Citation
Do you have a job opening that you would like to promote on SSRN?
Recommended Papers
-
Risk Management: Coordinating Corporate Investment and Financing Policies
By Kenneth Froot, David S. Scharfstein, ...
-
Why Firms Use Currency Derivatives
By Christopher Geczy, Bernadette A. Minton, ...
-
The Use of Foreign Currency Derivatives and Firm Market Value
By George Allayannis and James Weston
-
Exchange Rate Exposure, Hedging, and the Use of Foreign Currency Derivatives
By George Allayannis and Eli Ofek
-
Do Firms Hedge in Response to Tax Incentives?
By John R. Graham and Daniel A. Rogers
-
How Much Do Firms Hedge with Derivatives?
By Wayne R. Guay and S.p. Kothari
-
How Much Do Firms Hedge with Derivatives?
By Wayne R. Guay and S.p. Kothari
-
By John M. Griffin and René M. Stulz
