Review of Accounting Studies, 7, 217–227, 2002 C 2002 Kluwer Academic Publishers. Manufactured in The Netherlands. DORON NISSIM firstname.lastname@example.org Columbia University, Graduate School of Business, 604 Uris Hall Minton, Schrand and Walther (2002) (MSW) investigate whether cash ﬂow (earnings) volatility helps predict subsequent levels of cash ﬂow (earnings). Price is the present value of expected future cash ﬂows, so if cash ﬂow volatility forecasts future cash ﬂows (the numerator in the present value calculation), it should have valuation implications. A similar motivation applies to earnings, which may be viewed as a proxy for cash ﬂow. Most previous studies that investigate the valuation implications of cash ﬂow volatility or earnings volatility focus on the relation between volatility and the cost of capital (i.e., the denominator in the present value calculation). Many studies have documented a positive association between earnings volatility and risk measures such as market beta (e.g., Beaver, Kettler and Scholes, 1970). Indeed, in a survey of research relating accounting numbers to systematic risk, Ryan (1997) argues that earnings variability has historically been the accounting variable most strongly related to systematic equity risk. Other studies have reported a negative relation between earnings volatility and the earnings coefﬁcient in either
Review of Accounting Studies – Springer Journals
Published: Oct 21, 2004
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