The Predictive Qualities of Earnings Volatility and Earnings Uncertainty

Posted: 1 Oct 2014

See all articles by Dain C. Donelson

Dain C. Donelson

University of Iowa

Robert J. Resutek

University of Georgia - J.M. Tull School of Accounting

Date Written: July 1, 2014

Abstract

This study examines the differential predictive power of past earnings volatility for analyst forecast errors and future returns. Past earnings volatility jointly captures two correlated, but distinct, earnings properties: time-series earnings variation and uncertainty in future earnings. To distinguish between these two earnings properties, we develop a forward-looking measure of earnings uncertainty that has a minimal mechanical link to variation in prior-period earnings realizations and does not rely on analyst forecasts. Our results suggest that future earnings uncertainty, and not time variation in earnings, is associated with overly optimistic future earnings expectations of equity analysts and investors. We provide the first empirical evidence on the relevance of future earnings uncertainty to analysts and investors over one-year horizons. In addition, we provide empirical evidence showing that forecast dispersion is a poor measure of earnings uncertainty.

Keywords: Earnings Volatility, Information Uncertainty, Earnings Prediction, Analyst Forecasts, Asset Pricing

JEL Classification: G14, M41

Suggested Citation

Donelson, Dain C. and Resutek, Robert J., The Predictive Qualities of Earnings Volatility and Earnings Uncertainty (July 1, 2014). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2503042

Dain C. Donelson

University of Iowa ( email )

108 Pappajohn Business Building
Iowa City, 52242-1000
United States

Robert J. Resutek (Contact Author)

University of Georgia - J.M. Tull School of Accounting ( email )

Athens, GA 30602
United States

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