Fundamentals or managerial discretion? The relationship between accrual variability and future stock return volatility

Publisher:
Wiley-Blackwell Publishing Asia
Publication Type:
Journal Article
Citation:
Abacus, 2013, 49 (4), pp. 441 - 475
Issue Date:
2013-01
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This paper extends the theoretical framework of Callen and Segal (2004) and Vuolteenaho (2002) to investigate the association between accrual variability and firm-specific risk. The empirical evidence supports our prediction that increased uncertainty in 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. However, 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. Our findings therefore support the conclusion that the market places little weight on information conveyed by that component of accounting accruals that is most likely to reflect accounting choices, implementation decisions and managerial opportunism.
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