Stock Return Volatility And Firm Performance Volatility

This paper studies the relationship between the cash flow volatility, earnings volatility and stock return volatility. As the proxy of the operation risk, I suppose the cash flow volatility and earnings volatility positively correlate with the stock return volatility. The Chinese stock market is an emerging market whose efficiency and stability is lower than mature market like US stock market. In this paper, I explore if the stock return movements is linked with the change of fundamental value of firms. I adopt all the nonfinancial A-shares in Chinese stock market in 2003-2012 to test two multiple linear regression models which separately shows correlation between earnings movements or cash flow movements and stock return movements. Two models are established in which the asset, current ratio, leverage and return on asset is the control variables. The result of my test shows the cash flow volatility and earnings volatility positively correlate with the stock return volatility. The R-square of earnings model is higher than that of cash flow model It indicates that the earnings volatility has stronger explanatory power to the stock return volatility than cash flow volatility. However, the R-square of these models is very low, which indicates that stock price change is more due to other factors change rather than fundamental value change in a firm. Study also shows the relationship between cash flow volatility and stock return volatility is relevant with the level of cash flow volatility.