Review of Accounting Studies

, Volume 19, Issue 4, pp 1346–1392

The role of “other information” in analysts’ forecasts in understanding stock return volatility

Article

DOI: 10.1007/s11142-013-9272-5

Cite this article as:
Shan, Y., Taylor, S. & Walter, T. Rev Account Stud (2014) 19: 1346. doi:10.1007/s11142-013-9272-5
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Abstract

This study identifies “other information” in analysts’ forecasts as a legitimate proxy for future cash flows and examines its incremental role in explaining stock return volatility. We suggest that “other information” contains information about fundamentals beyond that reflected in current financial statements and reflects firms’ fundamentals on a more timely basis than dividends or earnings. Using standardized regressions, we find volatility increases when current “other information” is more uncertain and increases more in response to unfavorable news compared to favorable news. Variance decomposition analysis shows that the variance contribution of “other information” dominates that of expected-return news. The incremental role of “other information” is at least half of the effect of earnings in explaining future volatility. The results are more pronounced for firms with poor information environments. Overall, our results highlight the importance of including “other information” as an additional cash-flow proxy in future studies of stock prices and volatility.

Keywords

Other informationAnalysts’ forecastsStock return volatilityVariance decomposition

JEL Classification

M41G14D84

Copyright information

© Springer Science+Business Media New York 2014

Authors and Affiliations

  1. 1.School of AccountingUniversity of Technology, SydneyBroadwayAustralia
  2. 2.Discipline of FinanceBusiness School, The University of SydneySydneyAustralia
  3. 3.Member ServicesSirca LimitedThe RocksAustralia