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Earnings volatility, ambiguity, and crisis‐period stock returns
Author(s) -
Ahmed Anwer S.,
McMartin Andrew S.,
Safdar Irfan
Publication year - 2020
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12420
Subject(s) - ambiguity , volatility (finance) , earnings , economics , stock (firearms) , financial economics , financial crisis , monetary economics , capital asset pricing model , finance , macroeconomics , mechanical engineering , philosophy , linguistics , engineering
Financial crises are marked by substantial increases in ambiguity where prices appear to decouple from fundamentals. Consistent with ambiguity‐based asset pricing theories, we find that ambiguity concerns are more severe for firms with higher earnings volatility, causing investors to demand a higher ambiguity premium for such firms. While there is no relation between earnings volatility and stock returns under normal conditions, there is a significant negative relation between crisis‐period stock returns and prior earnings volatility. The effect is stronger in firms with low institutional ownership and low analyst following, consistent with ambiguity concerns being greatest amongst firms with unsophisticated investors.