Earning Volatility,Cash-flow Volatility And Firm Value

This paper studies the relationship between the earnings volatility, cash flowvolatility and firm value. The integration of firm value and risk management theory,improving the domestic situation about the research of firm value is concentrated inmicrocosmic factors, and achieving a combination of firm value and risk managementtheory.In the empirical study of firm value, the research finds that earnings volatility,cash flow volatility and firm value are in a significant negative correlation. After theanalysis of volatility risk, financial index and the firm value, the thesis figures out thatcash flow volatility and the firm value are in a significant negative correlation, andcash flow volatility can transmit a signal about the firm value. That is, unlike cashflows, earnings can be smoothed via accruals, so explanatory power is not well thancash volatility.In the empirical study about earnings response coefficients, this thesis regressesaccrual volatility and excludes a part that can be easily influenced by other explainedvariables. Considering that accrual volatility and earnings response coefficients arenot just a linear relationship, there may be other non-linear relationship. This thesisdivides accrual volatility into smooth range and volatility range. The results presentthat most listed companies are in smooth range. In the smooth range, accrual volatilityand earnings response coefficients are negatively related that the smaller accrualvolatility provides incremental information for investors. In the volatility range,accrual volatility and earnings response coefficients are positively related, the greateraccrual volatility provides incremental information for investors. To sum up: theearnings which are more smoothly or greater than cash flow provide investors withincremental information.The study demonstrates that the impacts of earnings volatility and cash flowvolatility on firm value are composed by two parts. The first part is the impact of cashflow volatility on the firm value that earnings volatility, cash flow volatility and firmvalue are in a significant negative correlation. The second part is the impact of accrualvolatility on firm value that the earnings which are more smoothly or greater thancash flow provide investors with incremental information.