The predictive qualities of earnings volatility and earnings uncertainty

Dain C. Donelson () and Robert J. Resutek ()
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Dain C. Donelson: University of Texas at Austin
Robert J. Resutek: University of Georgia

Review of Accounting Studies, 2015, vol. 20, issue 1, No 15, 470-500

Abstract: Abstract This study examines the differential predictive power of past earnings volatility for analyst forecast errors and future returns. Past earnings volatility jointly captures two correlated, but distinct, earnings properties: time-series earnings variation and uncertainty in future earnings. To distinguish between these two earnings properties, we develop a forward-looking measure of earnings uncertainty that has a minimal mechanical link to variation in prior-period earnings realizations and does not rely on analyst forecasts. Our results suggest that future earnings uncertainty, and not time variation in earnings, is associated with overly optimistic future earnings expectations of equity analysts and investors. We provide the first empirical evidence on the relevance of future earnings uncertainty to analysts and investors over 1-year horizons. In addition, we provide empirical evidence showing that forecast dispersion is a poor measure of earnings uncertainty.

Keywords: Earnings volatility; Information uncertainty; Earnings prediction; Analyst forecasts; Asset pricing (search for similar items in EconPapers)
JEL-codes: G14 M41 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s11142-014-9308-5

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