The role of “other information” in analysts’ forecasts in understanding stock return volatility

Yaowen Shan, Stephen Taylor () and Terry Walter
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Yaowen Shan: University of Technology, Sydney
Stephen Taylor: University of Technology, Sydney
Terry Walter: Business School, The University of Sydney

Review of Accounting Studies, 2014, vol. 19, issue 4, No 3, 1346-1392

Abstract: Abstract This study identifies “other information” in analysts’ forecasts as a legitimate proxy for future cash flows and examines its incremental role in explaining stock return volatility. We suggest that “other information” contains information about fundamentals beyond that reflected in current financial statements and reflects firms’ fundamentals on a more timely basis than dividends or earnings. Using standardized regressions, we find volatility increases when current “other information” is more uncertain and increases more in response to unfavorable news compared to favorable news. Variance decomposition analysis shows that the variance contribution of “other information” dominates that of expected-return news. The incremental role of “other information” is at least half of the effect of earnings in explaining future volatility. The results are more pronounced for firms with poor information environments. Overall, our results highlight the importance of including “other information” as an additional cash-flow proxy in future studies of stock prices and volatility.

Keywords: Other information; Analysts’ forecasts; Stock return volatility; Variance decomposition (search for similar items in EconPapers)
JEL-codes: D84 G14 M41 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s11142-013-9272-5

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