The Dynamics of Performance Volatility and Firm Valuation

44 Pages Posted: 17 Aug 2014 Last revised: 26 Feb 2017

See all articles by J. Daniel Chi

J. Daniel Chi

University of Nevada, Las Vegas (UNLV) - Department of Finance

Xunhua Su

Norwegian School of Economics (NHH)

Date Written: September 15, 2015

Abstract

We construct a model to illustrate the dynamics of cash flow volatility and firm valuation. As a firm progressively invests into its growth opportunities, its book value increases and catches up with its market value, reducing the valuation multiple (Q). Cash flow volatility (CFV) decreases due to the diversification effect of investing into more market segments. We document a positive CFV-Q association, which varies with firm size, investment opportunities, and the correlation across market segments. Empirical findings strongly support the model predictions and are robust to alternative explanations offered by extant studies on firm growth, volatility, and valuation.

Keywords: cash flow volatility, firm valuation, growth, firm size, firm age, Tobin's Q

JEL Classification: G30, G31

Suggested Citation

Chi, Jianxin Daniel and Su, Xunhua, The Dynamics of Performance Volatility and Firm Valuation (September 15, 2015). Journal of Financial and Quantitative Analysis, Vol. 52, Issue 1, pp. 111-142, February 2017. Available at SSRN: https://ssrn.com/abstract=2481264 or http://dx.doi.org/10.2139/ssrn.2481264

Jianxin Daniel Chi (Contact Author)

University of Nevada, Las Vegas (UNLV) - Department of Finance ( email )

4505 S. Maryland Parkway
Box 456008
Las Vegas, NV 89154-6008
United States

HOME PAGE: http://www.unlv.edu/people/jianxin-chi

Xunhua Su

Norwegian School of Economics (NHH) ( email )

Helleveien 30
Bergen, NO-5045
Norway

HOME PAGE: http://sites.google.com/site/xunhuasu/research

Register to save articles to
your library

Register

Paper statistics

Downloads
414
rank
68,486
Abstract Views
4,959
PlumX Metrics
!

Under construction: SSRN citations while be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information