The effects of earnings and cash flow permanence on their incremental information content in Thailand

Abstract

We examine whether the incremental information content of cash flows from operations (earnings) increases when earnings (cash flows) are transitory in Thailand's emerging capital market. Prior research for developed capital markets (e.g. the United States and Japan) has found cash flows play a more important role in explaining security returns when earnings are transitory. The Stock Exchange of Thailand (“SET”) required listed firms to provide a Statement of Cash Flows beginning in 1994. This requirement was not in response to investor demand, but was motivated by the SET's desire to employ standards similar to those of developed markets. We find that for a sample of 448 firm-years between 1995 and 1997, cash flows have greater incremental information content and earnings have less information content when earnings are relatively transitory and cash flows are relatively permanent. When cash flows are relatively transitory, we find they have significantly less information content and earnings have significantly more. © City University of Hong Kong.