Earnings Volatility and Earnings Prediction: Analysis and UK Evidence

Colin Clubb and Guoli Wu

Journal of Business Finance & Accounting, 2014, vol. 41, issue 1-2, 53-72

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.

Date: 2014
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