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

Yaowen Shan*, Stephen Taylor, Terry Walter

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

2 Citations (Scopus)

Abstract

This study extends the theoretical framework of Callen and Segal (2004) and Vuolteenaho (2002) to investigate the association between accrual variability and firm-level stock return volatility. The empirical evidence supports our prediction that increased uncertainty in current-period 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. 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. Overall, our results suggest that uncertainty reflected in accrual information is subsequently reflected in the fluctuation of future stock returns, and that the predictive content in accruals primarily reflects firms' fundamental uncertainty, rather than any effects of managerial choices and interventions in the accounting process.

Original languageEnglish
Pages (from-to)441-475
Number of pages35
JournalAbacus
Volume49
Issue number4
DOIs
Publication statusPublished - Dec 2013
Externally publishedYes

Keywords

  • Accruals variability
  • Fundamental and discretionary components
  • Managerial discretion
  • Stock return volatility
  • Systematic and idiosyncratic risk

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