An examination of the information content of Danish earnings and cash flows

Abstract

This study examines the information content of earnings and cash flows on the basis of Danish data. The study is motivated by the recent implementation of the Danish cash flow standard RV 11. No prior studies have examined the information content of Danish cash flows. In addition, the results of non-Danish cash flow studies are not consistent. Thus, there is no clear evidence as to whether cash flows have incremental information content beyond that of earnings. Finally, most cash flow studies focus only on cash flow from operations (CFO). This study also examines the information content of cash flow after investments (CFAI) and net cash flow (NCF). The results of the various tests are generally consistent with the following statements: (1) earnings are relatively more informative than cash flows; (2) the aggregated effect of cash flows has incremental information content beyond that of earnings; (3) after controlling for the effect of earnings, CFO (NCF) is negatively (positively) associated with the contemporaneous annual stock return at conventional significance levels. The coefficient on CFAI is not statistically different from zero; (4) over longer return intervals, the incremental information content of cash flows beyond earnings is maintained.