Abstract

ABSTRACT Purpose: To analyze the impact of extreme earnings and cash flows on the persistence, value relevance, and accruals quality of Brazilian public firms. Originality/gap/relevance/implications: The present study contributes to the literature by analyzing extreme earnings and cash flows. Because they change the results of the period in which they occur in an unusual manner, this study suggests that studying their behaviors and impacts on the quality of the information disclosed by companies tends to contribute to optimal decision making in the capital market. Key methodological aspects: The analyzed sample comprised non-financial public companies traded on the BM&FBovespa stock exchange from 2005 to 2014, with estimates made using quantile regression. Summary of key results: The main results indicate that cash flows are more persistent than earnings because the accruals component of the latter makes them less persistent. Extreme values of both earnings and cash flows affect the persistence of these variables, with a strong and negative effect on cash flows. Finally, extreme values of accruals negatively affect accruals quality because, compared to moderate quantiles, they significantly alter the standard deviation of extreme quantiles. Key considerations/conclusions: The presence of extreme values in this study's focus variables negatively influenced market information quality, reducing its predictive power and, consequently, its relevance. Furthermore, controlling for extreme values, it was possible to observe the incremental information content of these two metrics.

Highlights

  • The uncertainties inherent to the market as a whole require the investor to seek sufficient information to reduce any risks associated with them

  • As discussed by Bowen, Burgstahler, and Daley (1987), the information content of cash flows and earnings is an important area of accounting research because it focuses on two issues of fundamental importance for financial statements: 1. it shows the degree to which cash flow data are capable of increasing the usefulness of information provided by the accrual basis, from which financial statements are constructed; and 2. it provides evidence on the extent to which accruals change cash flow data to provide useful information to the capital market (Clubb, 2003, p. 117)

  • This study focuses on persistence, value relevance, and accruals quality

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Summary

Introduction

The uncertainties inherent to the market as a whole require the investor to seek sufficient information to reduce any risks associated with them In this sense, accounting information is an essential source of information about companies and their roles in negotiation, with regard to the inputs necessary for estimating future cash flows. Chen and Yang (2003) analyze the incremental content of both accounting measures in situations with extreme values Their sample comprises 25,993 company-years of data from the NYSE, AMEX and NASDAQ covering the 1989-1997 period. Their results show that extreme values of both earnings and cash flows affect the value relevance of these measures

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