Suhas A. Sridharan
Ph.D. Candidate, Accounting
Contact informationGraduate School of Business
PhD Program Office
655 Knight Way
Stanford, CA 94305
Research InterestsInformation and price discovery in capital markets
Mary E. Barth
Charles M.C. Lee
"Volatility forecasting using
financial statement information" (revise-and-resubmit at The
I seek to determine whether accounting-based fundamental information can supplement the volatility implied by option market prices in predicting future realized volatility. Prior research establishes that option-implied volatility is a biased estimator of future realized volatility. I hypothesize that financial statement information, by providing information about economic events correlated with future volatility, are informative in the prediction of future volatility and are not fully incorporated in either past volatility or the market's expectation of future volatility. This finding is robust to the measurement of option-implied volatility using either the Black-Scholes model or a model-free approach. I also find that a trading strategy that takes a long (short) position in firms with accounting-based fundamentals indicative of high (low) future volatility generates positive straddle portfolio returns. Taken together, my results indicate that the market's failure to fully process accounting-based fundamental information explains some of the previously documented bias in implied volatility.
"Accounting quality in the corporate bond market"
In this paper I argue that, in the context of bond valuation, the dimensions of accounting quality that are most relevant are those that describe the quality of firm's balance sheet disclosures. In measuring information quality, I focus on two metrics of balance sheet quality: a measure of asset-side balance sheet conservatism and a measure of the discretionary amount of off-balance sheet debt. I predict that these balance sheet-based measures of accounting quality will be more strongly associated with bond prices than are earning-based quality measures such as smoothness and accruals quality. I support this prediction by demonstrating that the structure of bond payoffs lead bondholders to react differently to book value and earnings disclosures. Using the Merton (1974) model, I further predict and show that the relative valuation of book values and earnings is a function of a firm's default risk.