Do Investors Value Smooth Performance?

45 Pages Posted: 12 Mar 2008

See all articles by Brian Rountree

Brian Rountree

Rice University - Jesse H. Jones Graduate School of Business

James Weston

Rice University - Jesse H. Jones Graduate School of Business

George Allayannis

University of Virginia - Darden School of Business

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

Rountree, Brian Robert and Weston, James Peter and Allayannis, George, Do Investors Value Smooth Performance?. Journal of Financial Economics (JFE), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1105077

Brian Robert Rountree

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005-1892
United States

James Peter Weston (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

6100 South Main Street
P.O. Box 1892
Houston, TX 77005
United States
713-348-4480 (Phone)
713-348-6331 (Fax)

George Allayannis

University of Virginia - Darden School of Business ( email )

Box 6550
Charlottesville, VA 22906-6550
United States
434-924-3434 (Phone)

HOME PAGE: http://faculty.darden.edu/allayannisy

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