Abstract
Financial crises are marked by substantial increases in ambiguity where prices appear to decouple from fundamentals. Consistent with ambiguity-based asset pricing theories, we find that ambiguity concerns are more severe for firms with higher earnings volatility, causing investors to demand a higher ambiguity premium for such firms. While there is no relation between earnings volatility and stock returns under normal conditions, there is a significant negative relation between crisis-period stock returns and prior earnings volatility. The effect is stronger in firms with low institutional ownership and low analyst following, consistent with ambiguity concerns being greatest amongst firms with unsophisticated investors.
| Original language | English (US) |
|---|---|
| Journal | Accounting and Finance |
| DOIs | |
| State | Accepted/In press - Jan 1 2018 |
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Keywords
- Ambiguity
- Earnings volatility
- Financial crisis
- Stock returns
ASJC Scopus subject areas
- Accounting
- Finance
- Economics, Econometrics and Finance (miscellaneous)
Cite this
Earnings volatility, ambiguity, and crisis-period stock returns. / Ahmed, Anwer S.; McMartin, Andrew; Safdar, Irfan.
In: Accounting and Finance, 01.01.2018.Research output: Contribution to journal › Article
}
TY - JOUR
T1 - Earnings volatility, ambiguity, and crisis-period stock returns
AU - Ahmed, Anwer S.
AU - McMartin, Andrew
AU - Safdar, Irfan
PY - 2018/1/1
Y1 - 2018/1/1
N2 - Financial crises are marked by substantial increases in ambiguity where prices appear to decouple from fundamentals. Consistent with ambiguity-based asset pricing theories, we find that ambiguity concerns are more severe for firms with higher earnings volatility, causing investors to demand a higher ambiguity premium for such firms. While there is no relation between earnings volatility and stock returns under normal conditions, there is a significant negative relation between crisis-period stock returns and prior earnings volatility. The effect is stronger in firms with low institutional ownership and low analyst following, consistent with ambiguity concerns being greatest amongst firms with unsophisticated investors.
AB - Financial crises are marked by substantial increases in ambiguity where prices appear to decouple from fundamentals. Consistent with ambiguity-based asset pricing theories, we find that ambiguity concerns are more severe for firms with higher earnings volatility, causing investors to demand a higher ambiguity premium for such firms. While there is no relation between earnings volatility and stock returns under normal conditions, there is a significant negative relation between crisis-period stock returns and prior earnings volatility. The effect is stronger in firms with low institutional ownership and low analyst following, consistent with ambiguity concerns being greatest amongst firms with unsophisticated investors.
KW - Ambiguity
KW - Earnings volatility
KW - Financial crisis
KW - Stock returns
UR - http://www.scopus.com/inward/record.url?scp=85059043694&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85059043694&partnerID=8YFLogxK
U2 - 10.1111/acfi.12420
DO - 10.1111/acfi.12420
M3 - Article
AN - SCOPUS:85059043694
JO - Accounting and Finance
JF - Accounting and Finance
SN - 0810-5391
ER -