Information Content Of Cash Flows Research Articles

The relative valuation of cash flow and current accruals affected by their extremity

PurposeRecent studies on the securities market’s differential pricing of earnings components have shown that cash flow from operations is more highly valued than total accruals and that moderate cash flow from operations has higher valuation than extreme total accruals. An interesting question that follows is whether these findings hold regarding the differential valuations of cash flow and current accruals. This study aims to extend prior research by addressing this issue in two ways. First, the authors examine the incremental information content of cash flow from operations beyond working capital from operations. Second, the authors assess the effect of extreme working capital from operations on the incremental information content of cash flow from operations. This study aims to extend prior research by addressing this issue in two ways.Design/methodology/approachThis study adopts market-based accounting research to test its hypotheses and to achieve its objectives. Specifically, this study uses statistical associations between accounting data and stock returns to examine the incremental information content (value relevance) of cash flow and working capital from operations and the effect of extreme working capital from operations on the incremental information content of cash flow.FindingsThe results show that cash flow from operations is not more highly valued than current accruals (both being valued equivalently). However, moderate cash flow from operations has higher valuation than extreme current accruals (each is valued differently). Overall, these research findings indicate that cash flow becomes more important for valuation as accruals get “extreme”.Practical implicationsAs accruals are unlikely to persist to be permanent across the years, these results can be interpreted as indicating that cash flow and accruals information are used jointly by investors, with one being more important than the other depending on the relative “extremeness” of each. Therefore, both are of value to the investor and both should be reported.Originality/valueThe paper contributes to the UK research on determining the preferred level of disaggregation of earnings components, i.e. operating cash flow, current accruals and non-current accruals. This would help investors to improve their investment and credit decisions.

The ability of cash flows to predict the earning: Evidence from Jordan

This study aims to investigate the ability of cash flows components to predict the earning and to know the extent of the relationship between accounting profits and cash flow measures. The study sample consisted of 77 industrial companies listed on the Amman Stock Exchange in Jordan for the period from 2006 to 2019. This study relied on the regression method to test the relationship between the study variables. The study findings showed that the cash flows from operating, investing, and financial activities have a statistically significant impact on predicting future earnings. The study also examined the effect of length of operating cycle and company’s size on the predictive ability of cash flows regarding future earnings. The main results for this aspect are that large companies and short operating cycle companies have higher prediction ability for future earnings than small and long operating cycle companies. This paper provides evidence of the information content of cash flows for future earnings in emerging markets like Jordan and is important for Jordanian shareholders by enabling them to evaluate company’s performance. AcknowledgmentsI would like to thank Amman Arab University for its great support, and for funding this study.

The Information Content of Cash Flows Components and Accounting Earnings for Explaining Stock Market Activity: Egyptian Evidence

Purpose – The purpose of this paper is to highlight the role of the information content of cash flows and accounting earnings in explaining changes in the Egyptian stock market activity. Design/methodology/approach – The paper uses multiple regression models. The sample used in the current study consists of 13 banks that are listed on the Egyptian stock market in the period from 2002 to 2016 resulting in 195 observations. Findings – There is a significant negative relationship between changes in cash flows from investing activities and stock return, and there is a significant positive relationship between bank size and stock return. There is a significant positive relationship between changes in each component of cash flows and trading volume. There is a significant positive relationship between bank size and trading volume. There is a significant positive relationship between changes in each component of cash flows and trading value. There is a significant positive relationship between bank size and trading value. There is a significant positive relationship between bank size and stock return. There is a significant positive relationship between changes in earnings before extraordinary items and trading volume. There is a significant positive relationship between bank size and trading volume. There is a significant positive relationship between changes in earnings before extraordinary items and trading value. There is a significant positive relationship between bank size and trading value. The combined regression model integrating cash flows components and earnings before extraordinary items have higher explanatory power for changes in stock return, trading volume, and trading value than that of the individual models of cash flow components or earnings before extraordinary items separately. Originality/value – o the best of the author's knowledge, there are no Egyptian studies to date examining the effect of cash flows component and accounting earnings on stock market activity. Consequently, this paper contributes to the limited literature by suggesting a new measure for stock market activity by using stock return; trading volume; trading value. Furthermore, it is the first paper to investigate the relationship between cash flows and accounting earnings on stock market activity in the banking sector.

A comparative study of information content of cash flow, cash value added, accounting earnings, and market value added to book value of total assets in evaluating the firm performance

The aim of the present study was to compare the utility of traditional accounting reporting and financial reporting for performance evaluations. Accordingly, the relationship between six ratios of net cash flows, net operating cash flows, cash value added, income after tax, income before tax, and market value added to the book value of total assets and Tobin’s Q ratio as an indicator of performance evaluation were examined. For this purpose, the information of 122 companies listed on Tehran Stock Exchange in the years 2009 to 2014 were used. Besides, linear regression and analysis of variance (ANOVA) were used to analyze the data. The results showed that except for the ratio of net cash flows to the book value of total assets, there was a significant relationship between the other five ratios. In addition, it was noted that cash value added to net operating cash flows had more information content concerning evaluating the firm performance. The results also indicated that net cash flows did not contain information content for evaluating the firm performance. However, the market value added had the maximum information to be used for evaluating the firm performance.

The Incremental Information Content of the Cash Flow Statement: An Australian Empirical Investigation

The general objective of the present study is to investigate and assess the incremental information content of cash flow disclosures as required by the AASB 1026 “Statement of Cash Flows”. This test addresses the issue of whether a change in cash flow components has the same relationship with security prices as that in earnings. Several previous studies indicate both income and cash flow statements may be mutually exclusive or mutually inclusive statements.The data to test three hypotheses came from companies listed on the Australian Stock Exchange for the period of 1992 to 1997, a subsequent period of the requirement to apply AASB 1026. General results from hypothesis tests indicate that cash flows have information content more than that provided by earnings alone and that cash flows have relative information content, given earnings alone. This finding suggests that the cash flow statement and the income statement provide mutually exclusive information. This finding refutes results of previous studies from the USA and UK that indicated cash flow data had less information value than that conveyed by earnings. Other implications and suggestion for further study are also discussed in the paper.

The relative information content of cash flows and earnings affected by their extremity

Purpose – Many studies examine the relative information content of earnings and cash flows from operations. Most studies find that earnings have higher information content than cash flows. An interesting question that follows is whether these findings hold after controlling the extremity of earnings and cash flows. The purpose of this paper is to examine the relative information content of earnings and cash flows in the following four different cases: first, moderate earnings vs moderate cash flows, second, extreme earnings vs moderate cash flows, third, moderate earnings vs extreme cash flows, and fourth, extreme earnings vs extreme cash flows. Design/methodology/approach – To assess the relative information content of earnings and cash flows for each of the four cases mentioned above, the authors compare the explanatory power for regression of returns on unexpected earnings relative to regression of returns on unexpected cash flows. Therefore, the author compares the adjusted R2 of the model with earnings variables and the model with cash flows variables using Vuong's test, that examines the statistical significance of the difference between adjusted R2s of the rival (non-nested) models, and interpret a statistically higher adjusted R2 as an indicator for higher relative information content. Findings – The results show that: first, when both earnings and cash flows are moderate, earnings are more highly associated with stock market price changes than cash flows, second, when both earnings and cash flows are extreme, earnings also have greater relative information content than cash flows, third, when the extremity differs between earnings and cash flows, the moderate variable is superior to the other extreme variable in explaining security returns. These results suggest that earnings are definitely more value relevant than cash flows. However, only in cases when cash flows from operations are moderate and earnings are extreme, cash flows possess higher information content than earnings. Practical implications – The explanatory power for stock returns will be higher for earnings or cash flows depending on which is more highly persistent. This result reverses the conventional finding of the superiority of earnings over cash flows in explaining security returns. Originality/value – In contrast to previous studies, the authors control for the extremity of earnings and cash flows when evaluating the relative information content of earnings and cash flows from operations.

Incremental Information Content of Cash Flow and Earnings in the Iranian Capital Market

Purpose - This study aims to examine the incremental information content of cash flw from operations and earnings in the Iranian capital market. Design, methodology, and approach - Based on market-based accounting research, this study uses statistical associations between accounting data (earnings and cash flw) and stock returns to assess/measure the incremental information content (value relevance) of cash flw and earnings. A multivariate regression model based on panel data is used to examine the incremental information content of earnings and cash flow from operations. Results - The results show that both earnings and cash flow from operations have incremental information content beyond each other. These results are consistent with the findings of recent studies. Overall, the fidings of this study support the usefulness of cash flw information in addition to earnings, in fim valuation by investors in the Iranian market. Conclusions - The study makes the following contributions to the Iranian literature on incremental information content of cash flw and earnings. First, this study employs actual cash flw data derived from cash flw statements. Second, this study employs a large sample size for a more recent period.

The impact of earnings extremity on information content of cash flow

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...

The value relevance of earnings and cash flows: the Tunisian stock market evidence

This study examines the value-relevance of three performance measures: earnings, cash flows from operations (CFO) and funds flows from operations (FFO). It addresses three questions. First, do accounting earnings and cash flows data have information content? Second, does accounting earnings (cash flows) have incremental information content over cash flows (earnings)? Third, does the incremental information content of cash flows (earnings) increases (decreases) with a decrease in the permanence of earnings? The empirical findings are consistent with: 1) all three performance measures having explanatory power for returns individually and earnings performing better than cash flows in explaining security price variation; 2) earnings having incremental information content beyond CFO and FFO; 3) CFO having incremental information content beyond earnings; 4) FFO having no incremental information content over earnings. Results do not however support any increase in the incremental information content of cash flow...

Incremental Information Content of Cash Flows Versus Funds from Operations and Earnings: Empirical Results from French Companies

Abstract: The purpose of our study is to examine the information content of cash flows versus funds from operations and earnings in the French context. By applying two methodologies relating to linear and nonlinear models, our work analyzes the capacity of these accounting measures to explain stock returns of French listed companies in the SBF120 index. Our results relating to linear models show that cash flows and funds from operations have incremental information content while nonlinear models note that these accounting measures have incremental information content only in the case of extreme variations. In addition, the results note that earnings have incremental information content in the case of moderate variations. One can infer that market participants in French context use and appreciate information contained in cash flows to evaluate firms’ performances especially when they show extremes variations.

The Value Relevance of Earnings and Cash Flows: Empirical Evidence for Tunisian Stock Market

This study examines the value-relevance of three performance measures: earnings, cash flows from operations (CFO) and funds flows from operations (FFO). It addresses three questions. First, do accounting earnings and cash flows data have information content? Second, does accounting earnings (cash flows) have incremental information content over cash flows (earnings)? Third, does the incremental information content of cash flows increases and the incremental information content of earnings decreases with a decrease in the permanence of earnings? Based on tests of association between security returns and these fundamental variables, a pattern of consistent results emerges. All three performance measures have explanatory power for returns individually. Results are also consistent with earnings performing better than FFO and CFO in explaining security price variation and suggest that accruals as a whole convey relevant information about changes in firm value. In relation to the incremental information content of these variables, results are consistent with (i) earnings having incremental information content beyond CFO and FFO, and (ii) CFO having incremental information content in addition to that contained in earnings and (iii) FFO having no incremental information content over earnings. While results of the study don’t support any increase in the incremental information content of cash flows in presence of transitory items in earnings, they however provide evidence on investors’ rationality since they show that the permanent component of earnings is more valued by the market than the transitory component.

The Impact of Accounting Conservatism on the Magnitude of the Differential Information Content of Cash Flows and Accruals

This study documents the relation between accounting conservatism and the differential response to operating accruals. Feltham and Ohlson's (1995) valuation framework predicts a positive association between the valuation multiple on operating assets and accounting conservatism. The relation between operating assets and operating accruals provides the basis for Feltham and Ohlson's (1995) further prediction of a positive association between the response coefficient to operating accruals and accounting conservatism. Stober (1996) and Ahmed, Morton, and Schaefer (2000) present evidence that the valuation multiple on operating assets is increasing in conservatism. Hence, by investigating the relation between conservatism and the differential response to operating accruals, this study extends the findings of Stober (1996) and Ahmed, Morton, and Schaefer (2000) and provides additional evidence on the agreement of the Feltham and Ohlson (1995) framework with the data. Results are presented for both cross-sectional and firm-specific designs as well as alternative measures of conservatism. When firms are partitioned on conservatism, evidence is generally consistent with Feltham and Ohlson's (1995) prediction that as conservatism increases so does the magnitude of the response coefficient on operating accruals.

An Empirical Analysis of the Relationship between Cash Flow and Dividend Changes in Nigeria

The purpose of this study is to re‐evaluate the incremental information content of cash flows in explaining dividend changes, given earnings. I carry out an 882 firm‐year study by analysing the dividend changes‐cash flow relationship on a sample of 63 quoted firms in Nigeria over a wider testing period from 1984 to 1997. Despite the fact that I used a wider testing period than previous studies and more refined cash flow measures than previous studies, I also introduced dummy variables to capture economic policy changes in the economy. The association of cash flows with dividend changes is tested using the modified Lintner‐Brittain model as adopted in Charitou and Vafeas (1998) on pooled cross sectional/time series data from the full sample of observations from 1984‐97. The models are estimated using the ordinary least squares (OLS) method and I do find a significant relationship between dividend changes and cash flow unlike previous studies. The empirical results reveal that the relationship between cash flows and dividend changes depend substantially on the level of growth, the capital structure choice, size of each firm and economic policy changes.

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

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.

An examination of the information content of Danish earnings and cash flows

This study examines the information content of earnings and cash flows on the basis of Danish data. The study is motivated by the recent implementation of the Danish cash flow standard RV 11. No prior studies have examined the information content of Danish cash flows. In addition, the results of non-Danish cash flow studies are not consistent. Thus, there is no clear evidence as to whether cash flows have incremental information content beyond that of earnings. Finally, most cash flow studies focus only on cash flow from operations (CFO). This study also examines the information content of cash flow after investments (CFAI) and net cash flow (NCF). The results of the various tests are generally consistent with the following statements: (1) earnings are relatively more informative than cash flows; (2) the aggregated effect of cash flows has incremental information content beyond that of earnings; (3) after controlling for the effect of earnings, CFO (NCF) is negatively (positively) associated with the contemporaneous annual stock return at conventional significance levels. The coefficient on CFAI is not statistically different from zero; (4) over longer return intervals, the incremental information content of cash flows beyond earnings is maintained.

Distortion effects and extreme observations in empirical research: An analysis of the incremental information content of cash flows

AbstractLinear regression models are used in a number of studies examining the presence or absence of incremental information content in cash flows. The results of these studies are not consistent. This paper provides evidence of the impact that extreme observations can exert on parameter estimates in a regression model. Two techniques commonly used to address the problem of extreme observations are considered. These techniques, winsorising the data and trimming the data, are compared to a regression diagnostic technique, Cook's distance. The comparison of these techniques provides evidence that the choice of technique can determine the significance or otherwise of regression results. This paper concludes that the inconsistency in reported results examining the incremental information content in cash flows may be attributed to the techniques adopted to address the issue of extreme observations.

Earnings Permanence and the Incremental Information Content of Cash Flows from Operations

This paper investigates whether the incremental information content of cash flows from operations increases when earnings are transitory. We suggest that when the valuation implications of earnings are limited by the presence of transitory items, cash flows from operations disclosures may play a larger role as an additional value signal. We measure transitory items using earnings change scaled by beginning-of-period price (Ali [1994]) and the earnings-to-price ratio (Ou and Penman [1989] and Ali and Zarowin [1992]). Our analysis suggests that the incremental information content of accounting earnings decreases, and the incremental information content of cash flows from operations increases, with a decrease in the permanence of earnings.

The Information Content of Cash Flows and the Random Walk: Evidence from the Helsinki Stock Exchange

Abstract Using a sample from the Helsinki Stock Exchange, this paper examines whether observed market reactions to unexpected cash flows are sensitive to the random walk assumption of cash flow behaviour. We consider the random walk (with drift) model commonly used in related literature, and we consider cash flow expectations generated with individually estimated parsimonious univariate time series models and an index model. Market reactions to unexpected cash flows are indiscernible under the random walk assumption, while significant market reactions are found when expectations of cash flows are measured with models which better capture their time series properties. Prior studies that rely on the random walk assumption have probably been biased against finding a significant market reaction to cash flow information.