Determinants of time‐series properties of earnings and cash flows

Abstract

AbstractThis paper examines the relative ability of some economic factors in explaining systematic differences in the time‐series properties of earnings vs. cash flows. The factors used are: firm size, inventory level, capital intensity, degree of competition, and product type (durable‐ nondurable). The results confirm that these factors explain firms' cash flow properties better than earnings properties. Specifically, tests of the differences in the coefficients of variation and autocorrelation coefficients of the earnings series suggest size and product‐type effect. Cash flows, in contrast, indicate an effect with respect to all variables. These findings contribute to our understanding of how the structural forms of the processes generating earnings and cash flows are fundamentally different. The strength of the relationship between economic factors and cash flow properties is potentially relevant to some research efforts directed at cash flow prediction.