The Dynamics of Performance Volatility and Firm Valuation

Document Type

Article

Publication Date

1-1-2017

Publication Title

Journal of Financial and Quantitative Analysis

Publisher

Cambridge University Press

Volume

52

Issue

1

First page number:

111

Last page number:

142

Abstract

We construct a model to illustrate the dynamics of cash-flow volatility (CFV) and firm valuation. As a firm progressively invests in its growth opportunities, its book value increases and catches up with its market value, reducing the valuation multiple (Q). CFV decreases because of the diversification effect of investing in more market segments. We document a positive CFV-Q association, which varies with firm size, investment opportunities, and the correlation across market segments. Empirical findings strongly support the model's predictions and are robust to alternative explanations offered by extant studies on firm growth, volatility, and valuation. © 2017 Michael G. Foster School of Business, University of Washington.

Language

english

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