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The higher moments of future earnings

Journal

Accounting Review

Subject

Accounting

Publishing details

Accounting Review 2021 Vol 96:1 p 91-116

Authors / Editors

Chang W;Monahan S;Ouazad A;Vasvari F

Biographies

Florin Vasvari

Publication Year

2021

Abstract

We evaluate whether reported accounting numbers are informative about earnings uncertainty and whether earnings uncertainty is priced. We use quantile regressions to forecast the standard deviation, skewness and kurtosis of future earnings. These three moments are important measures of earnings uncertainty because they reflect the size of the average deviation from expected earnings and the amount of extreme upside potential, extreme downside risk or both. We develop a novel approach for evaluating the reliability of our forecasts and we show that they are reliable. We also document that: (1) equity prices are increasing (decreasing) in the standard deviation and skewness (kurtosis) of lead return on equity and (2) credit spreads are increasing (decreasing) in the standard deviation and kurtosis (skewness) of lead return on assets. Our results indicate that historical financial statements are informative about earnings uncertainty and that earnings uncertainty is priced.

Keywords

Earnings uncertainty; Higher moments; Forecasting; Equity prices; Credit spreads

Available on ECCH

No


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