Do investors value smooth performance?

Brian Rountree, James P. Weston and George Allayannis

Journal of Financial Economics, 2008, vol. 90, issue 3, 237-251

Abstract: This paper presents empirical evidence that cash-flow volatility is negatively valued by investors. The magnitude of the effect is substantial with a 1% increase in cash-flow volatility, resulting in approximately a 0.15% decrease in firm value. We show that this increase, however, is not associated with earnings smoothing resulting from managers' accrual estimates. Our results are consistent with a preference by the market for less volatile cash flows and suggest that managers' efforts to produce smooth financial statements add value, but only via the cash component of earnings.

Keywords: Cash-flow; volatility; Earnings; smoothing; Risk-management (search for similar items in EconPapers)
Date: 2008
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Citations: View citations in EconPapers (83)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jfinec:v:90:y:2008:i:3:p:237-251

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