The authors acknowledge the helpful suggestions of two reviewers as well as Eli Bartov, Philip Brown, Dan Dhaliwal, Peter Easton, Neal Fargher, Jere Francis, John Lyon, Tom Smith, Nasser Spear, Joseph Weber, and Sarah Zechman, attendees at the University of Technology, Sydney Summer Research School, and the American Accounting Association Annual Meeting, and workshop participants at the Australian National University, University of Melbourne, University of Auckland, University of Western Australia, and Victoria University, Wellington. The authors acknowledge research support from the Accounting and Audit Quality program of the Capital Markets Co-operative Research Centre, a research centre established by the Federal Government of Australia.
Fundamentals or Managerial Discretion? The Relationship between Accrual Variability and Future Stock Return Volatility
Article first published online: 17 DEC 2013
© 2013 The Authors. Abacus © 2013 Accounting Foundation, The University of Sydney
Volume 49, Issue 4, pages 441–475, December 2013
How to Cite
Shan, Y., Taylor, S. and Walter, T. (2013), Fundamentals or Managerial Discretion? The Relationship between Accrual Variability and Future Stock Return Volatility. Abacus, 49: 441–475. doi: 10.1111/abac.12015
- Issue published online: 17 DEC 2013
- Article first published online: 17 DEC 2013
- Accruals variability;
- Fundamental and discretionary components;
- Managerial discretion;
- Stock return volatility;
- Systematic and idiosyncratic risk
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.