The Role of 'Other Information' in Analysts’ Forecasts in Understanding Stock Return Volatility

53 Pages Posted: 13 Mar 2008 Last revised: 2 Nov 2018

See all articles by Yaowen Shan

Yaowen Shan

University of Technology Sydney; Financial Research Network (FIRN)

Stephen L. Taylor

University of Technology Sydney; Financial Research Network (FIRN)

Terry S. Walter

University of Sydney; University of Technology, Sydney - School of Finance and Economics; Financial Research Network (FIRN)

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Date Written: August 1, 2013

Abstract

This study proposes and validates “other information” in analysts’ forecasts as a legitimate proxy for future cash flows, and examines its incremental role in explaining stock return volatility. We suggest that “other information” contains information about fundamentals beyond that reflected in current financial statements, and reflects firms’ fundamentals on a more timely basis than dividends or earnings. The link between “other information” and volatility can be derived from a combination of the accounting version of the Campbell-Shiller model (Campbell and Shiller 1988a, 1988b; Vuolteenaho 2002) and Ohlson’s (1995) linear information dynamics. Using standardized regressions we find volatility increases when current “other information” is more uncertain, and increases more in response to unfavorable news compared to favorable news. Variance decomposition analysis shows that the variance contribution of “other information” dominates that of expected-return news. The incremental role of “other information” is at least half of the effect of earnings in explaining future volatility. The results are valid for measures of both systematic and idiosyncratic volatility, and are more pronounced for firms with poor information environments. Overall, our results highlight the importance of including “other information” as an additional cash-flow proxy in future studies of stock prices and volatility.

Keywords: Other information, analysts’ forecasts, volatility, variance decomposition

JEL Classification: M41, G14, D84

Suggested Citation

Shan, Yaowen and Taylor, Stephen L. and Walter, Terry Stirling, The Role of 'Other Information' in Analysts’ Forecasts in Understanding Stock Return Volatility (August 1, 2013). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1105632 or http://dx.doi.org/10.2139/ssrn.1105632

Yaowen Shan

University of Technology Sydney ( email )

PO Box 123
Broadway, NSW 2007
Australia

HOME PAGE: http://profiles.uts.edu.au/Yaowen.Shan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Stephen L. Taylor (Contact Author)

University of Technology Sydney ( email )

UTS Business School
PO Box 123 Broadway
Sydney, NSW 2007
Australia
61295143437 (Phone)
61295143513 (Fax)

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Terry Stirling Walter

University of Sydney ( email )

P.O. Box H58
Sydney, NSW 2006
Australia

University of Technology, Sydney - School of Finance and Economics ( email )

Haymarket
Sydney, NSW 2007
Australia
+61 2 9514 3860 (Phone)
+61 2 9514 7711 (Fax)

HOME PAGE: http://datasearch.uts.edu.au/business/finance/staff/StaffDetails.cfm?UnitStaffId=5373

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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