Articlegreen1998

Additional Evidence on the Incremental Information Content of Cash Flows and Accruals: The Impact of Errors in Measuring Market Expectations.

Ray J. Pfeiffer · Pieter T. Elgers · May H. Lo · Lynn L. Rees

62 citations0/0 files storedThe Accounting Review

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Financial Markets and Investment Strategies Auditing, Earnings Management, Governance Financial Reporting and Valuation Research

Abstract

Abstract This study evaluates the relation between security returns and funds-based earnings components. We document that proxies for market expectations of the components that are based on measures of historical serial- and cross-dependencies are substantially more accurate than random-walk proxies. Moreover, we detect significantly higher valuations of the operating cash flow component of earnings, relative to current accruals, when market expectations are represented using the dependency-based predictions. Such differential valuation is not detectable for random-walk representations. Contrary to results in Ali (1994), we find incremental information in unexpected cash flows over the whole spectrum (moderate and extreme) of unexpected cash flow realizations.

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References

1994Accounting earnings and cash flows as measures of firm performance 1987Cross-Sectional Dependence and Problems in Inference in Market-Based Accounting Research 1986The Association of Operating Cash Flow and Accruals with Security Returns 1986The Relative Information Content of Accruals and Cash Flows: Combined Evidence at the Earnings Announcement and Annual Report Release Date 1984Professional Expectations: Accuracy and Diagnosis of Errors 1989The Nature and Amount of Information in Cash Flows and Accruals.1987THE INCREMENTAL INFORMATION CONTENT OF THE ACCRUAL AND FUNDS COMPONENTS OF EARNINGS AFTER CONTROLLING FOR EARNINGS 1994The Incremental Information Content of Earnings, Working Capital from Operations, and Cash Flows

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2006Accruals, Cash Flows and the Post‐Earnings‐Announcement Drift 2003The Incremental Information Content of Earnings and Cash Flows from Operations Affected by Their Extremity 2008Market perceptions of discretionary accruals by debt renegotiating firms during economic downturn 2004The Impact of Earnings Management on the Value-Relevance of Financial Statement Information

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