Abstract
Purpose – In contrast to recent US studies, almost all prior UK studies have not supported the incremental information content of cash flow beyond earnings. In addition, to date no UK study has addressed the effect of earnings extremity on the incremental information content of cash flow and earnings whilst controlling for the extremity of cash flow. Therefore, and in order to assess the generality of recent US findings, the aim of this study is to examine the incremental information content of cash flow from operations and earnings and the effect of extreme earnings on the incremental information content of cash flow from operations in the UK firms.Design/methodology/approach – Based on market‐based accounting research, this study uses statistical associations between accounting data (earnings and cash flow) and stock returns to assess/measure the incremental information content (value relevance) of cash flow and earnings and the effect of extreme earnings on the incremental information content of cash f...
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