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05-02-2021 | Issue 2/2021 Open Access

Review of Accounting Studies 2/2021

Management forecasts of volatility

Journal:
Review of Accounting Studies > Issue 2/2021
Authors:
Atif Ellahie, Xiaoxia Peng
Important notes
The original online version of this article was revised due to a retrospective Open Access order.
A correction to this article is available online at https://​doi.​org/​10.​1007/​s11142-021-09592-x.

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Abstract

We examine the predictive information content of the management forecasts of stock return volatility (i.e., expected volatility) that are disclosed in annual reports. We find that expected volatility predicts near-term and longer-term stock return volatility and earnings volatility incremental to implied volatility, historical volatility, firm characteristics, and alternative measures of uncertainty. We also find that expected volatility reflects managers’ private information about their firms’ future investment activities, such as mergers and acquisitions and R&D intensity. Finally, we find that the predictive power of expected volatility shrinks when managers have stronger incentives to manage earnings. Overall, we provide novel evidence that management forecasts of volatility contain private information about future uncertainty that can help forecast volatility.

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