The Dynamics of Performance Volatility and Firm Valuation

Jianxin Daniel Chi and Xunhua Su

Journal of Financial and Quantitative Analysis, 2017, vol. 52, issue 1, 111-142

Abstract: We construct a model to illustrate the dynamics of cash-flow volatility (CFV) and firm valuation. As a firm progressively invests in its growth opportunities, its book value increases and catches up with its market value, reducing the valuation multiple (Q). CFV decreases because of the diversification effect of investing in 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’s predictions and are robust to alternative explanations offered by extant studies on firm growth, volatility, and valuation.

Date: 2017
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