Earnings Volatility, Cash Flow Volatility, and Informed Trading

Earnings Volatility, Cash Flow Volatility, and Informed Trading ABSTRACT I examine whether earnings that are smoother or more volatile than cash flows provide or garble information. Consistent with theories that predict more informed trading when public information is less informative, I find that bid‐ask spreads and the probability of informed trading are higher both when earnings are smoother than cash flows and also when earnings are more volatile than cash flows. Additional tests suggest that managers' discretionary choices that lead to smoother or more volatile earnings than cash flows garble information, on average. However, I find that informed trading is attenuated in settings in which theory suggests that discretionary smoothing or volatizing of earnings is likely to be informative. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Accounting Research Wiley

Earnings Volatility, Cash Flow Volatility, and Informed Trading

Journal of Accounting Research, Volume 46 (4) – Sep 1, 2008

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Publisher
Wiley
Copyright
©, University of Chicago on behalf of the Institute of Professional Accounting, 2008
ISSN
0021-8456
eISSN
1475-679X
D.O.I.
10.1111/j.1475-679X.2008.00293.x
Publisher site
See Article on Publisher Site

Abstract

ABSTRACT I examine whether earnings that are smoother or more volatile than cash flows provide or garble information. Consistent with theories that predict more informed trading when public information is less informative, I find that bid‐ask spreads and the probability of informed trading are higher both when earnings are smoother than cash flows and also when earnings are more volatile than cash flows. Additional tests suggest that managers' discretionary choices that lead to smoother or more volatile earnings than cash flows garble information, on average. However, I find that informed trading is attenuated in settings in which theory suggests that discretionary smoothing or volatizing of earnings is likely to be informative.

Journal

Journal of Accounting ResearchWiley

Published: Sep 1, 2008

References

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