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

Journal Article


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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.

Authors


  •   Shan, Yaowen (external author)
  •   Taylor, Stephen (external author)
  •   Walter, Terry S.

Publication Date


  • 2013

Citation


  • Shan, Y., Taylor, S. & Walter, T. (2013). Fundamentals or managerial discretion? The relationship between accrual variability and future stock return volatility. Abacus: a journal of accounting, finance and business studies, 49 (4), 441-475.

Scopus Eid


  • 2-s2.0-84890388927

Ro Full-text Url


  • http://ro.uow.edu.au/cgi/viewcontent.cgi?article=2191&context=buspapers

Ro Metadata Url


  • http://ro.uow.edu.au/buspapers/1184

Has Global Citation Frequency


Number Of Pages


  • 34

Start Page


  • 441

End Page


  • 475

Volume


  • 49

Issue


  • 4

Place Of Publication


  • Australia

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.

Authors


  •   Shan, Yaowen (external author)
  •   Taylor, Stephen (external author)
  •   Walter, Terry S.

Publication Date


  • 2013

Citation


  • Shan, Y., Taylor, S. & Walter, T. (2013). Fundamentals or managerial discretion? The relationship between accrual variability and future stock return volatility. Abacus: a journal of accounting, finance and business studies, 49 (4), 441-475.

Scopus Eid


  • 2-s2.0-84890388927

Ro Full-text Url


  • http://ro.uow.edu.au/cgi/viewcontent.cgi?article=2191&context=buspapers

Ro Metadata Url


  • http://ro.uow.edu.au/buspapers/1184

Has Global Citation Frequency


Number Of Pages


  • 34

Start Page


  • 441

End Page


  • 475

Volume


  • 49

Issue


  • 4

Place Of Publication


  • Australia