The Role of Non-Accounting Information in Understanding Stock Return Volatility

46 Pages Posted: 17 Jan 2009 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)

Date Written: October 1, 2008

Abstract

Uncertainty about firms' future payoffs is the dominant factor in explaining stock return volatility at the firm level. However, summary financial statement numbers such as earnings only provide a limited measure of expected payoffs, as they do not reflect firms' fundamentals on a timely basis. We demonstrate theoretically and empirically that information about firms' fundamentals contained in analysts' forecasts (which we label as "non-accounting information") is expected to influence future stock return volatility. When combined with Ohlson's (1995) linear information dynamics, the accounting version of the Campbell-Shiller model (Campbell and Shiller 1988a, 1988b; Vuolteenaho 2002) implies that if current non-accounting information is more uncertain, then future stock returns are expected to be more volatile. Our empirical evidence supports the theoretical predictions, and the results are valid for measures of both systematic and idiosyncratic volatility. Additional analysis yields some evidence that both favourable and unfavourable news from non-accounting information increases future stock return volatility. Overall, our results highlight the relevance of information in analysts' forecasts beyond what is contained in the current financial statements.

Keywords: Non-accounting information, analysts' forecasts, stock price volatility, systematic and idiosyncratic risk

JEL Classification: G14

Suggested Citation

Shan, Yaowen and Taylor, Stephen L. and Walter, Terry Stirling, The Role of Non-Accounting Information in Understanding Stock Return Volatility (October 1, 2008). Available at SSRN: https://ssrn.com/abstract=1328843 or http://dx.doi.org/10.2139/ssrn.1328843

Yaowen Shan (Contact Author)

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

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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