Discussion of “The Role of Volatility in Forecasting”

Discussion of “The Role of Volatility in Forecasting” Review of Accounting Studies, 7, 217–227, 2002 C 2002 Kluwer Academic Publishers. Manufactured in The Netherlands. DORON NISSIM dn75@columbia.edu 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 http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Discussion of “The Role of Volatility in Forecasting”

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Kluwer Academic Publishers
Copyright © 2002 by Kluwer Academic Publishers
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
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