Earnings Volatility and Earnings Prediction: Analysis and UK Evidence

20 Pages Posted: 25 Feb 2014

See all articles by Colin Clubb

Colin Clubb

University of London - King's College London - Department of Management

Guoli Wu

CITIC Securities

Date Written: January/February 2014

Abstract

This paper confirms that US evidence of a negative relationship between earnings persistence and earnings volatility applies to UK firms over the period 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 core earnings persistence.

Keywords: earnings volatility, persistence, core and transitory earnings, earnings prediction and forecasting

Suggested Citation

Clubb, Colin and Wu, Guoli, Earnings Volatility and Earnings Prediction: Analysis and UK Evidence (January/February 2014). Journal of Business Finance & Accounting, Vol. 41, Issue 1-2, pp. 53-72, 2014, Available at SSRN: https://ssrn.com/abstract=2400801 or http://dx.doi.org/10.1111/jbfa.12055

Colin Clubb

University of London - King's College London - Department of Management ( email )

150 Stamford Street
London, SE1 9NN
United Kingdom

Guoli Wu

CITIC Securities

Beijing
China

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