Variation in idiosyncratic return volatility from 1978 to 2009 is attributable to discretionary accrual volatility and the correlation between premanaged earnings and discretionary accruals reflective of information quality across firms. These results are robust to controls for firm operating uncertainty, growth options, business-cycle variations, and firm age and industry effects, and they highlight the importance of managerial discretion in determining idiosyncratic volatility.

This research reports that an increasing level of accounting conservatism over the 1973-2005 period is associated with: (1) an increase in the ability of current earnings to predict future cash flows and (2) a decrease in the ability of current earnings to predict future earnings. We also find that usefulness of earnings for explaining stock prices over book values is positively related to reliability but not to relevance. Our results hold for the constant and full samples in both in-sample and out-of-sample analyses and are robust to the use of alternative measures for relevance, reliability, earnings usefulness, and conservatism. Our findings about the relations among conservatism, relevance, reliability, and usefulness suggest a trade-off between relevance and reliability and seem to indicate that the adoption of an increasing number of conservative accounting standards has a possible adverse impact on earnings usefulness through a negative effect on reliability.

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This research reports that an increasing level of accounting conservatism over the 1973-2005 period is associated with: (1) an increase in the ability of current earnings to predict future cash flows and (2) a decrease in the ability of current earnings to predict future earnings. We also find that usefulness of earnings for explaining stock prices over book values is positively related to reliability but not to relevance. Our results hold for the constant and full samples in both in-sample and out-of-sample analyses and are robust to the use of alternative measures for relevance, reliability, earnings usefulness, and conservatism. Our findings about the relations among conservatism, relevance, reliability, and usefulness suggest a trade-off between relevance and reliability and seem to indicate that the adoption of an increasing number of conservative accounting standards has a possible adverse impact on earnings usefulness through a negative effect on reliability.

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We examine the economic benefits of using realized volatility to forecast future implied volatility for pricing, trading, and hedging in the S&P 500 index options market. We propose an encompassing regression approach to forecast future implied volatility, and hence future option prices, by combining historical realized volatility and current implied volatility. Although the use of realized volatility results in superior performance in the encompassing regressions and out-of-sample option pricing tests, we do not find any significant economic gains in option trading and hedging strategies in the presence of transaction costs. Copyright (c) 2009 The Southern Finance Association and the Southwestern Finance Association.

This research reports that an increasing level of accounting conservatism over the 1973-2005 period is associated with (1) an increase in the ability of current earnings to predict future cash flows (a measure of relevance, e.g., Kim and Kross, 2005); and (2) a decrease in the ability of current earnings to predict future earnings (a measure of reliability in the Richardson et al. [2005] sense). We also find that usefulness of earnings for explaining stock prices over book values is positively related to reliability but not to relevance. Our results hold for the constant and full samples and in both in-sample and out-of-sample analyses and are also robust to the use of different measures for relevance, reliability, earnings usefulness, and conservatism. Our findings about the relations between conservatism, relevance, reliability, and usefulness suggest a trade-off between relevance and reliability and seem to indicate that the adoption of an increasing number of conservative accounting standards possibly has an adverse impact on earnings usefulness through their negative effects on reliability.

No abstract