Value Relevance Of Cash Flows Research Articles

The impact of Covid-19 pandemic on the value relevance of cash flows: evidence from banks

PurposeThis paper is motivated by the ongoing debate on the value relevance of cash flow statement (CFS) between bank regulators, on one hand, and accounting standard setters, on the other hand. The importance and usefulness of cash flows during economic turmoil exacerbated by the Covid-19 pandemic has recently gained attention. Hence, this paper investigates the impact of Covid-19 pandemic on the value relevance of cash flows (CF) beyond accounting earnings and book equity.Design/methodology/approachA panel of 236 bank-year observations is examined for value relevance in emerging capital markets of Gulf Cooperation Council (GCC) countries. Using value relevance regression, operating and non-operating CF items are tested for value relevance beyond earnings and book value of equity during the periods 2018–2019 (pre-pandemic) and 2020–2021 (pandemic).FindingsThere is limited value relevance of CF beyond accounting earnings and the book value of equity. The distinction between operating and non-operating CF is not informative. However, the value relevance is significant during the pandemic, indicating that investors rely on CF for valuation purposes at times of uncertainty, corroborating further research on CF distress predictive ability.Originality/valueThis paper provides novel evidence on value relevance of CF and its superiority to accounting earnings and equity values during times of uncertainty. It extends a small body of research in the banking sector in emerging markets. Hence, it complements prior literature and has practical implications to accounting standard setters and bank regulators in emerging markets.

Value relevance of accounting information in an emerging market: the case of IFRS adoption by non-financial listed firms in Saudi Arabia

PurposeThe paper aims to provide empirical evidence of the impact of IFRS adoption on the value relevance of accounting information in the emerging market of Saudi Arabia.Design/methodology/approachThe sample consists of 98 non-financial listed firms operating in Saudi Arabia from 2014 to 2019, representing the years before and after IFRS adoption. The authors apply basic and extended price models to examine the value relevance of select accounting figures.FindingsThe authors findings provide evidence that accounting information is, generally, value relevant to the Saudi Arabian capital market. However, mixed results exist for particular accounting variables. Both earnings and cash flows are value-relevant in the period before and after IFRS adoption; equity is only relevant in the post-adoption period. Furthermore, IFRS adoption also increases the explanatory power of earnings. An increase in the value relevance of earnings and equity hurts the value relevance of cash flows. The effects are moderated by leverage and dividend policy.Originality/valueThe authors contribute to the ongoing discussion of the economic effects of IFRS adoption in emerging markets. The empirical findings show that initial concerns about IFRS adoption, as reflected by the negative coefficient within the regression analysis, are mitigated once the usefulness of the individual accounting variables published in financial statements is investigated.

Causes of country-specific effect related to the value relevance of cash flows and earnings: evidence from France, Germany, Italy and Spain

Causes of country-specific effect related to the value relevance of cash flows and earnings: evidence from France, Germany, Italy and Spain

Accounting information in innovative small cap firms: evidence from London’s Alternative Investment Market

We posit that investors and social media users place more weight on cash flows than on earnings for innovative small cap firms and that, in turn, innovative small cap firms (i) manage cash flows more than earnings, and (ii) disclose more cash flow than earnings information on social media. Using a matched sample of innovative and non-innovative small cap firms listed on the London’s Alternative Investment Market (AIM), we document that the value relevance of cash flows (earnings) is higher (lower) for innovative compared to non-innovative small cap firms. Using Twitter to examine the demand of accounting performance measures, we find that Twitter users more frequently retweet and include as ‘Favorite’ information about cash flows, than information about earnings for innovative small cap firms. We then show that innovative small cap firms engage less intensively in earnings management and exhibit higher abnormal cash flows compared to non-innovative small cap firms. Innovative small cap firms emphasise more information in their tweets about cash flows and less about earnings compared to non-innovative small cap firms. Cross-sectional tests demonstrate that seasoned equity offerings provide additional incentives to engage in increasing abnormal cash flow management activities.

Real earnings management and the relevance of operating cash flows: A study of french listed firms

The primary focus of this study is to investigate whether the level of earnings management through real activities (REM) affects the value relevance of reported cash flows from operations (CFO), precisely with regard to their ability to predict future CFOs. Using the data related to CAC all tradable listed French firms during 2008 through 2015, we provide evidence which supports the expected decrease in value relevance of reported CFO for future CFOs’ prediction in the presence of REM. Our finding highlights the fact that if managers decide to manipulate upward earnings through operating activities, they could adversely affect the information content of CFOs. More precisely, an aggressive deviation from normal activities leads to abnormal levels of the main operating inflows and outflows in an inconsistent way and this deteriorates the value relevance of cash flows from operations. This contribution is of use for creditors and investors and other key CFO users for prediction purposes as it urges them to make necessary adjustments when predicting the future ability of an entity to generate cash flows.

Have accounting numbers lost their value relevance during the recent financial credit crisis?

Abstract The objective of this paper is to examine the relative and incremental value relevance of cash flows from operations (CFO) around the recent financial credit crisis (pre, during, and post crisis periods). Based on a sample of UK FTSE 350, the study reassures the accounting literature that accounting numbers have not lost their value relevance over time. In particular, the findings show a significantly incremental association between firms’ market values on one hand, and book value (BV), Earning Per Share (EPS) and CFO, on the other hand, over all intervals examined. Further, the study provides new evidence that CFO has relative value relevance to both BV and EPS over all periods (pre, during, and post credit crisis period) to explain the cross variations in firms’ market values. Finally, our findings provide strong evidence about the superiority of the value relevance of CFO over the cash flows from investing and financing activities although the cash flows from investing activities reveal a higher explanatory power in the crisis period. The results provide great insights for the extant literature and reaffirms the usefulness of accounting information in making investment decisions.

The incremental value relevance of cash flows and earnings affected by their extremity

Purpose In contrast to earlier studies, the most recent studies on the incremental value relevance of earnings and cash flows from operations find that both earnings and cash flows have incremental value relevance beyond each other. An interesting question that follows is whether these findings hold after controlling the extremity of earnings and cash flows. This study, therefore, aims to examine the incremental value relevance of earnings and cash flows in the following four cases: moderate earnings and moderate cash flows, moderate earnings and extreme cash flows, extreme earnings and moderate cash flows and extreme earnings and extreme cash flows. Design/methodology/approach To evaluate the incremental value relevance (information content) of earnings and cash flows for each of the four cases mentioned above, we examine the statistical significance of the slope coefficients for regression of returns on both unexpected earnings and unexpected cash flows from operations. Findings The results show that (i) both moderate and extreme earnings have incremental value relevance beyond both moderate and extreme cash flows, (ii) moderate cash flows have incremental value relevance beyond both moderate and extreme earnings and (iii) extreme cash flows lack incremental value relevance beyond moderate earnings; however, they (extreme cash flows) have incremental value relevance beyond extreme earnings. These results suggest that earnings and cash flows have incremental value relevance. However, only in cases when cash flows are extreme and earnings are moderate, cash flows do not possess incremental value relevance. In further analysis, we find that the value relevance for cash flows and earnings decreases when they are extreme and transitory. Moreover, the value relevance for cash flows increases when they are moderate (not extreme) and the other competing measure (earnings) is transitory and extreme. Practical implications The results support the idea that earnings and cash flows from operations complement each other in explaining variation in returns. However, when cash flows are extreme and less informative, investors rely more on earnings in firm valuation, especially when earnings are moderate. Because earnings are unlikely to persist to be permanent across the years, these results can be interpreted as indicating that cash flows and earnings information are used jointly by investors. Originality/value In contrast to previous studies, we control for the extremity of earnings and cash flows when evaluating the incremental value relevance of earnings and cash flows from operations.

Value relevance of earnings and cash flows during the global financial crisis

Purpose – The purpose of this paper is to investigate the incremental value relevance of cash flow from operations (CFO) given book value and earnings. It also examines the relative value relevance of earnings and CFO and changes therein between the 2008‐2009 global financial crisis (GFC) and the pre‐crisis period (PCP).Design/methodology/approach – Least square regressions are estimated using modified Ohlson model to examine the research questions. Relative and incremental value relevance is examined by adjusted R2 and Vuong Z statistics.Findings – The findings suggest that CFO has value relevance incremental to book value and earnings. The findings also suggest that earnings has greater relative and incremental information content than CFO in the Australian market. The value relevance of earnings has increased and that of CFO has decreased during the GFC compared to the PCP.Research limitations/implications – This study focuses on a single country. Future studies can conduct cross‐country examination of...

The impact of life cycle on the value-relevance of cash flows versus accrual financial information: An empirical study based on Tehran Stock Exchange

The impact of life cycle on the value-relevance of cash flows versus accrual financial information: An empirical study based on Tehran Stock Exchange

Value Relevance, Idiosyncratic Risk, and External Financing Activities

This paper first examines the effects of value relevance of earnings and incremental value relevance of cash flows on net external financing, net equity financing and net debt financing. The investors, in general, suffer beta risk and idiosyncratic risk of a firm. The former is the main determinant of risk premium, and the latter can be controlled by the manager. If the firm has better control of idiosyncratic risk, it implies the manager has larger influence on stock returns. Under control accruals, value relevance of earnings and incremental value relevance of cash flows, we also examine the effects of net external, net debt and net equity financings on idiosyncratic risk. To test whether the external financing policy of a firm is consistent with over-investment hypothesis, this study investigate the effects of net external, net debt and net equity financings on future stock returns under controlling for value relevance of earnings and cash flows. This paper further analyzes the relation between current idiosyncratic risk and future stock returns following financing activities. We find that external financing activities are positively related to value relevance of earnings but are unrelated to incremental value relevance of operating cash flows, and external financing is unrelated to value relevance of operating cash flows but is positively related to incremental value relevance of earnings. Moreover, debt financing is unrelated to value relevance of cash flows but is positively correlated to incremental value relevance of earnings, and equity financing is unrelated to value or incremental value relevance of earnings but is positively correlated to value relevance and incremental value relevance of cash flows. We also find that both value relevance of earnings and cash flows are positively correlated to idiosyncratic risk, and current idiosyncratic risk and equity financing are negatively correlated to future returns after controlling value relevance of earnings and cash flows.

The value relevance of cash flows, current accruals, and non-current accruals in the UK

Cash flow statements have a longstanding history as mandated financial statement disclosures, having replaced funds flow statements. The usefulness of such disclosures with respect to one of the main purposes of financial statements—providing information relevant to the assessment of future cash flows and their uncertainty, and the market value of firms—is still subject to debate. This study investigates whether various partitions of earnings involving combinations of a cash flow measure of performance and measures of current accruals and non-current accruals improve the ability to explain market values in the UK relative to using earnings alone. Using a valuation model-based methodology, and employing a UK sample of non-financial firms for the years 1993 to 2007, our results suggest strong support for the assertion that cash flows can have incremental value relevance relative to either earnings or funds flows. By implication, cash flows can have separate value relevance from total and, in particular, current accruals. There is slightly less consistent evidence that current and non-current accruals can have separate value relevance but, nonetheless, the results are still strongly in favour in this respect. Generally, the main source of increase in explanatory power for market values is the separate inclusion of our cash flow measure in the estimated regressions. As a consequence, we conclude that the statement of cash flows in the UK provides information useful to UK investors in valuing firms. Further, requiring a cash flow statement, as opposed to a funds flow statement, improves the information content of financial statements in the UK.

The Value Relevance of Cash Flows, Current Accruals, and Non-Current Accruals in the UK

Cash flow statements have a longstanding history as mandated financial statement disclosures, having replaced funds flow statements. The usefulness of such disclosures with respect to one of the main purposes of financial statements - providing information relevant to the assessment of future cash flows and their uncertainty, and the market value of firms - is still subject to debate. This study investigates whether various partitions of earnings involving combinations of a cash flow measure of performance and measures of current accruals and non-current accruals improve the ability to explain market values in the UK relative to using earnings alone. Using a valuation model-based methodology, and employing a UK sample of non-financial firms for the years 1993 to 2007, our results suggest strong support for the assertion that cash flows can have incremental value relevance relative to either earnings or funds flows. By implication, cash flows can have separate value relevance from total and, in particular, current accruals. There is slightly less consistent evidence that current and non-current accruals can have separate value relevance but, nonetheless, the results are still strongly in favour in this respect. Generally, the main source of increase in explanatory power for market values is the separate inclusion of our cash flow measure in the estimated regressions. As a consequence, we conclude that the statement of cash flows in the UK provides information useful to UK investors in valuing firms. Further, requiring a cash flow statement, as opposed to a funds flow statement, improves the information content of financial statements in the UK.

The Value Relevance of Book Values, Earnings and Cash flows: Evidence from South Korea

The purpose of this paper is to investigate the relative and incremental value relevance of book value, accounting earnings and cash flows in security prices. The study basically uses Myers (1977), Ohlson (1995) and Feltham and Ohlson (1995) valuation model and the paper performs analyses for all samples divided into profit/loss firms and earnings managed/non-earnings managed firms to observe changes in value relevance over the periods of 1994-2005 in Korean stock markets(4,865 firm-year observations). The empirical results of the paper indicate that book value is the most value relevant variable and cash flows have more value relevance than accounting earnings in all samples, subsamples and periods. The results also show that combined value relevance of book value and cash flows is more value relevant than that of book value and accounting earnings, suggesting that cash flows can be a substitute for accounting earnings in equity valuation model. The important contribution of the study is documenting the deteriorated value relevance of accounting earnings and the increased value relevance of cash flows in equity valuation. This may be just limited to the period of 1994-2005 in Korean stock markets, or this could be the true pattern in which accounting earnings play no significant role in security prices.

Incentive Contracting and Value Relevance of Earnings and Cash Flows

ABSTRACTAccounting performance measures such as earnings and cash flows are useful for both valuation and performance evaluation purposes. However, little evidence exists on whether there is any association between these two roles. In this study, we provide large sample empirical evidence that the value relevance of earnings explains a significant amount of the cross‐sectional variation in the pay‐sensitivity of earnings and the incremental value relevance of cash flows explains variation in the marginal pay‐sensitivity of cash flows. We document that while both value relevance and compensation weight on earnings decline from the subperiod of 1993 to 1997 to the subperiod of 1998 to 2003, both value relevance and compensation weight on cash flows increase from the earlier subperiod to the later subperiod. Overall, our results provide additional evidence that value relevance of a performance measure plays a significant role in its use for performance evaluation.

Industry upheaval and valuation: Empirical evidence from the international oil and gas industry

Accounting literature suggests that contemporaneous earnings are more useful than current operating cash flow in predicting future cash flows and, therefore, also more relevant for company valuation. However, recent research indicates that elevated levels of merger and acquisition activity or a changing economic environment may reduce the value relevance of earnings. Using the oil and gas industry as a case, this paper examines how the oil industry upheaval in the late 1990s influenced the value relevance of financial statement information. We extend the literature by testing for a structural shift in the equity market valuation process. Our results provide evidence of a structural break in the value relevance of accounting information. In contrast to prior research, we find that the value relevance of cash flows actually decreased in the recent oil industry upheaval. On the other hand, the value relevance of book equity increased. Furthermore, we find that accounting-method choice (full cost versus successful efforts) affects the value relevance of accounting information.

The Value-Relevance of Cash Flows and Accruals: The Role of Investment Opportunities

ABSTRACT: We examine the role of investment opportunities as a determinant of the relative importance of cash flows from operations (CFO) and accruals in firm valuation. We find that at low investment-opportunity levels, CFO value-relevance increases with investment opportunities. When investment opportunities are high, accrual value-relevance declines as investment opportunities increase. Consequently, earnings value-relevance first varies directly and then inversely with investment opportunities. We show that the increase in CFO value-relevance is consistent with cost differentials between internal and external financing causing CFO to be an increasingly important determinant of the realization of investment opportunities. The decline in accrual value-relevance at high investment-opportunity levels appears to be attributable to accounting measurement deficiencies.

The Value-Relevance of Cash Flows and Accruals: the Role of Investment Opportunities

We examine the role of investment opportunities as a determinant of the relative importance of cash flows from operations (CFO) and accruals in firm valuation. We find that at low investment-opportunity levels, CFO value-relevance increases with investment opportunities. When investment opportunities are high, accrual value-relevance declines as investment opportunities increase. Consequently, earnings value-relevance first varies directly and then inversely with investment opportunities. We show that the increase in CFO value-relevance is consistent with cost differentials between internal and external financing causing CFO to be an increasingly important determinant of the realization of investment opportunities. The decline in accrual value-relevance at high investment-opportunity levels appears to be attributable to accounting measurement deficiencies.