The Relationship Between Predictability and Earnings Volatility: The Case of Companies Listed on the Casablanca Stock Exchange

Abstract

The study of the predictability of accounting results is extremely important for investors as well as for the various stakeholders of listed companies. The objective of this work is to study the relationship between the predictability of earnings and their volatility. In principle, the volatility of earnings is supposed to reduce its predictability. However, the existing literature, based on short-term horizon, fails to provide convincing results (Sloan, 1996; Lev and Thiagarajan 1993; Abarnell & Bushee, 1997).  Through this work, we first seek to verify the meaning and intensity of the relationship between predictability and volatility, while applying a standpoint of a long-term study. Then, we check the load of each component of the volatility - accounting component or economic component - on the predictability of earnings. Our results confirm our prediction, ie the presence of a negative relationship between volatility and the predictability of earnings. Nevertheless, this capacity decreases with the presence of the extreme values of earnings

Keywords: Predictability; volatility; accounting data; Morocco context.

DOI: 10.7176/RJFA/11-24-10

Publication date: December 31^st 2020