Abstract
We investigate the relation between UK accounting earnings volatility and the level of future earnings using a unique sample comprising some 10,480 firm-year observations for 1,481 non-financial firms over the 1985–2003 period. The findings confirm the in-sample result of an inverse volatility-earnings relation only for the 1998–2003 sub-period and for the most profitable firms. The out-of-sample forecast accuracy for the top earnings quintile improves when volatility is added as a regressor to a model including only lagged earnings. The findings are consistent with the over-investment hypothesis and the view that the earnings of the most volatile firms tend to mean revert more rapidly.
Translated title of the contribution | Does Volatility Improve UK Earnings Forecasts? |
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Original language | English |
Pages (from-to) | 1148 - 1179 |
Number of pages | 31 |
Journal | Journal of Business Finance and Accounting |
Volume | 36 |
DOIs | |
Publication status | Published - Dec 2009 |