Title: Does idiosyncratic return volatility capture information or noise?

Authors: Antonio Cerqueira; Claudia Pereira

Addresses: School of Economics and Management, University of Porto, Porto, 4200-464, Portugal ' Center for Studies in Business and Legal Sciences, School of Accounting and Administration of Porto, Polytechnic Institute of Porto, S. Mamede de Infesta, Portugal

Abstract: This paper examines the cross-sectional association between earnings quality and firm-specific return volatility for a sample of UK firms listed in the London Stock Exchange. Identifying the determinants of idiosyncratic volatility has been a topical issue since the Campbell et al. (2001) study which documents a noticeable increase in average firm-level volatility across time. Using panel data, we find that poor information environments resulting from poor earnings quality are associated with higher firm-specific return volatility. This finding is consistent with the noise-based approach of firm-specific return volatility. In addition, we provide empirical evidence that such association becomes stronger after combining accruals quality and the dispersion in analysts' forecasts to describe a poor information environment. These findings are likely to contribute to the debate on whether firm-specific return volatility captures more firm-specific information being impounded in stock prices or essentially reflects noise.

Keywords: idiosyncratic volatility; earnings quality; accruals quality.

DOI: 10.1504/IJTGM.2018.097277

International Journal of Trade and Global Markets, 2018 Vol.11 No.4, pp.270 - 292

Received: 02 Nov 2017
Accepted: 02 Sep 2018

Published online: 01 Jan 2019 *

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