Earnings Volatility and the Value of Earnings Releases for Markets

Abstract

Prior research has conflicting findings concerning earnings volatility's effect on earnings releases to the stock market. In this paper, "volatility" refers to the variability of accounting earnings information. For purposes of analysis, an option pricing model (OPM) framework is developed which shows that earnings directly associate with stock market price. This OPM model's characteristics indicate that higher (lower) accounting return volatilities will associate with lower (higher) market response coefficients to accounting earnings information. Empirical findings provide evidence that is consistent with this proposition. Recent earnings data (i.e., the previous four quarters) is sufficient to demonstrate a volatility effect on the earnings-return relation.

JEL Classification: G14