Management Forecasts of Volatility

Forecasting volatility is important but inherently difficult. We examine the predictive information content of management forecasts of stock return volatility (i.e., expected volatility) disclosed in annual reports. We find that expected volatility predicts near-term and longer-term stock return volatility and earnings volatility incremental to historical volatility, implied volatility, firm characteristics, and alternative measures of uncertainty. We also find that expected volatility reflects private information of managers about future investment activities, such as mergers and acquisitions, and R&D intensity. Finally, we find that the predictive power of expected volatility is lower when managers have stronger incentives to bias these forecasts in order to manage earnings. Overall, we provide novel evidence that management forecasts of volatility contain private information about future uncertainty that can be useful for forecasting volatility.