The higher moments of future earnings

Chang, W-J, Monahan, S J, Ouazad, A and Vasvari, F (2021) The higher moments of future earnings. Accounting Review, 96 (1). pp. 91-116. ISSN 0001-4826

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.

More Details

Item Type:	Article
Subject Areas:	Accounting
Additional Information:	© 2020 American Accounting Association
Date Deposited:	26 Jun 2020 11:15
Date of first compliant deposit:	25 Jun 2020
Subjects:	Accounting valuations Statistical analysis
Last Modified:	30 Dec 2024 02:24
URI:	https://lbsresearch.london.edu/id/eprint/1430

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