Management Forecasts of Volatility
Review of Accounting Studies, Forthcoming
50 Pages Posted: 9 Dec 2019 Last revised: 19 Nov 2020
Date Written: April 1, 2020
We examine the predictive information content of the management forecasts of stock return volatility (i.e., expected volatility) that are disclosed in annual reports. We find that expected volatility predicts near-term and longer-term stock return volatility and earnings volatility incremental to implied volatility, historical volatility, firm characteristics, and alternative measures of uncertainty. We also find that expected volatility reflects managers’ private information about their firms’ future investment activities, such as mergers and acquisitions and R&D intensity. Finally, we find that the predictive power of expected volatility shrinks when managers have stronger incentives to manage earnings. Overall, we provide novel evidence that management forecasts of volatility contain private information about future uncertainty that can help forecast volatility.
Keywords: volatility forecasting, expected volatility, disclosure, management forecasts
JEL Classification: M41, G13, G14
Suggested Citation: Suggested Citation