Predicting Future Cash Flow from Operations: Australian Evidence

Abstract

This paper investigates which accounting variable has superior predictive ability for future cash flow: current cash flow from operations, or current earnings. The question is examined in an Australian context for the years 1995 to 2005, on a sample of 350 firms. The question is also examined by industry for the same firms. In most U.S. studies, superior predictions are obtained using current earnings. However, the same result is not expected in Australia, due to the different industrial composition of the economy, and the superiority of cash flow data prepared under Australian accounting standards. Consistent with our expectation, the results indicate that current cash flow from operations has superior predictive ability over current earnings for future cash flow from operations, and also that cash flow from operations has higher incremental information content than current earnings.