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Fundamentals or Managerial Discretion? The Relationship between Accrual Variability and Future Stock Return Volatility
Author(s) -
Shan Yaowen,
Taylor Stephen,
Walter Terry
Publication year - 2013
Publication title -
abacus
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.632
H-Index - 45
eISSN - 1467-6281
pISSN - 0001-3072
DOI - 10.1111/abac.12015
Subject(s) - accrual , stock (firearms) , volatility (finance) , economics , econometrics , accounting , financial economics , earnings , mechanical engineering , engineering
This study extends the theoretical framework of C allen and S egal (2004) and V uolteenaho (2002) to investigate the association between accrual variability and firm‐level stock return volatility. The empirical evidence supports our prediction that increased uncertainty in current‐period accounting accruals is associated with significantly higher volatility of future stock returns, and the results are valid for measures of both systematic and idiosyncratic volatility. When accrual variability is decomposed into fundamental and discretionary portions, we find that the positive relationship between accrual variability and future stock return volatility is dominated by the fundamental component of accrual variability. Overall, our results suggest that uncertainty reflected in accrual information is subsequently reflected in the fluctuation of future stock returns, and that the predictive content in accruals primarily reflects firms' fundamental uncertainty, rather than any effects of managerial choices and interventions in the accounting process.