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Firms' debt levels rose, increasing the volatility of earnings.
Imagine an economy where one firm produces everything: its volatility of earnings determines volatility in GDP.
"We think that alone will significantly reduce the volatility of earnings associated with that business".
Beyond that, those companies investing in carbon reductions achieved a 50% lower volatility of earnings over the past decade and 21% stronger dividends than their low-ranking peers.
A survey of financial professionals undertaken by two academics, Charles Mulford and Eugene Comiskey, both of the Georgia Institute of Technology, found that three of the main motivations for "creative accounting" were to reduce the volatility of earnings, help the company meet forecasts and boost the share price.
We see this being achieved by a combination of a lower dividend (a cut by a third), new reinsurance covers (to reduce volatility of earnings going forward and capital consumption of the back-book) and portfolio adjustment/disposals, the largest of which could include Canada, in our view.
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Investors should also consider the volatility of earnings-estimates scores because estimates often change quickly, then hold near the new level.
Additional tests reveal that the increase in the volatility of GAAP earnings is mostly due to rapid earnings reversals, and especially the effect of large transient items during economic downturnsSome of this volatility may indeed be down to the use of mark-to-market accounting which means that changes in asset prices can affect the numbers.
While the behavior of NIPA earnings remains roughly the same over these two periods, the volatility of GAAP earnings increases ten-fold, and the correlation between GAAP and NIPA earnings changes falls to 0.35.
It also accords with the latest research on asset pricing, which says that the level of expected earnings is much less important than the expected volatility of those earnings.Thus, the success of Mr Greenspan and his colleagues around the world, which was widely heralded at the time, may have been destined to end in catastrophic failure.
If Mr Weill leaves that business alone, it will increase the volatility of Travelers' earnings.
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Justyna Jupowicz-Kozak
CEO of Professional Science Editing for Scientists @ prosciediting.com