المستخلص: |
This study investigates the effect of cash flow volatility on idiosyncratic volatility using a sample of all shares listed on the FTSE-350 index over the period (1999-2019). Following a recent study by Pae et al. (2018), this study used the DuPont decomposition of the return on equity to obtain the cash flows. Panel data analysis was used to test the empirical model using the fixed effect specification. The results of the study showed that the volatility of ROE components (net profit margin volatility, asset turnover volatility, and equity multiplier volatility) all have a positive and significant effect on idiosyncratic volatility. Finally, control variables including illiquidity and size are significant in explaining idiosyncratic volatility. The decomposition of return on equity using the DuPont approach is of great importance in portfolio management. If not taken into account, any uncertainty in the components that are associated with idiosyncratic volatility could lead to an underestimation of portfolio risk.
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