CEO's Operating Ability and the Association between Accruals and Future Cash Flows

This study investigates whether an individual CEO's operating ability, operationalized as the extent to which an individual CEO utilizes the company's assets efficiently to generate profits, explains the association between accruals and future cash flows. While this mapping can be driven by both the quality of accounting measurement and CEO operating ability, there is little empirical evidence on the latter link. After controlling for the CEO's accounting estimation ability, we find that the association between current period accruals and future cash flows is stronger when the CEO demonstrates superior operating ability. This suggests that a CEO's operating ability is an important determinant of the informativeness of current accruals for future cash flows.     

The Differential Persistence of Accruals and Cash Flows for Future Operating Income versus Future Profitability

Prior research provides evidence that a higher proportion of accrued relative to cash earnings is associated with lower earnings performance in the subsequent fiscal year. The result has been widely interpreted as indicative of higher levels of operating accruals relative to cash flows foreshadowing a subsequent earnings reversal, and thus signaling earnings management. We note, however, that earnings performance in prior studies is typically defined as one-year-ahead operating income divided by one-year-ahead invested capital, or a measure of profitability. We find that accruals are more highly associated than cash flows with invested capital in the denominator of the profitability measure. In contrast, accruals and cash flows have no differential relation to one-year-ahead operating income. The evidence is not consistent with accruals having a reversal effect on earnings. This suggests that the lower persistence of accruals versus cash flows may not be due to earnings management but may rather be due to the effect of growth on future profitability.     

Discussion of “The Differential Persistence of Accruals and Cash Flows for Future Operating Income versus Future Profitability”

Fairfield et al. (2003a, this issue) suggests that the accrual effect in Sloan (1996) is at least partly due to the fact that accruals signify an increase in (less-productive) net operating assets. Thus, the paper is a useful and thought-provoking reminder that accruals have both earnings and balance sheet effects. However, the impact of the empirical results is diminished by the lack of a convincing story that ties and grounds these results to other knowledge in the area.     

The Relationship between Earnings,Funds Flows and Cash Flows: Evidence for the UK

Recent UK information content studies have provided evidence of a significant relationship between earnings and share prices, as in the US, but have also identified an apparent lack of information content for operating cash flow, which is in marked contrast to findings from US research. This paper provides direct evidence on the relationship between earnings, funds flows and cash flows in the UK during the period 1965–84, using tests of association and predictive tests based on a research methodology applied by Bowen, Burgstahler and Daley (1986) to US data. The results provide UK evidence on the contemporaneous and predictive relationships between measures of earnings, funds flows and cash flows which are generally consistent with the US findings of Bowen et al. and which do not support the view that earnings in the UK are superior to cash flows as predictors of future cash flows.     

Incentive Contracting and Value Relevance of Earnings and Cash Flows

Accounting 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.     

公司操纵经营活动现金流量的三种手法

现金流量表以现金收付制为编制原则,通常认为经营活动现金流量(以下简称经营现金流)与会计盈余相比,不容易被操纵,是相对可靠的“硬”数字。然而,现金流量表并非净土,其“三分法”为经营现金流的确认提供了“会计选择”余地,为操纵经营现金流提供了空间。本文将操纵经营现金流的手法分为三种类型:“操纵准则”——利用现金流量表准则提供的判断空间和选择余地;“操纵业务”——利用理财工具影响现金流的时间;直接造假。这三种手法单独或综合使用的现象均较常见。一、操纵准则现金流量表采纳国际上较通行的“三分法”,将现金收支分为投资、筹…     

Future Cash Flow Predictability of Non‐IFRS Earnings: Australian Evidence

The global proliferation of reporting non‐International Financial Reporting Standards (IFRS) (pro forma) earnings has been subject to academic debate and regulatory reform. This study examines whether non‐IFRS earnings contain statistically significant information on future cash flow predictability that could be useful for investors. The study uses data from large Australian listed companies over a six‐year period (2006–11) covering three distinctive periods around the global financial crisis (GFC): pre‐GFC, GFC and post‐GFC. Results based on fixed effects panel estimation methods suggest non‐IFRS earnings do exert a significantly positive impact on future cash flow predictability but only during pre‐crisis and crisis periods.     

Prediction of Operating Cash Flows: Further Evidence from Australia

This paper examines empirically the relative abilities of current operating cash flows (hereafter OCF) and earnings in predicting future operating cash flows in Australia. It extends prior Australian research on cash flow prediction ( Percy and Stokes 1992 ; Clinch, Sidhu and Sing 2002 ; Farshadfar, Ng and Brimble 2009 ) by examining future cash flow predictions for one‐, two‐ and three‐year‐ahead forecast horizons; incorporating additional contextual variables likely to affect the predictive association between current cash flows or earnings and future cash flows; and comparing cross‐sectional versus time series‐based prediction models to ascertain the relative superiority of one approach over the other. Regression results reveal that the cash flow‐based models are more accurate in predicting future operating cash flows than earnings‐based models. This result, however, is moderated by firm‐specific contextual factors like firm size, negative versus positive cash flow pattern, cash flow variability and firm operating cycle. Finally, a comparison between cross‐sectional and time series approaches reveals that the cross‐sectional model outperforms the time series model for both the operating cash flows and earnings models in most of the forecast years.     

The Incremental Information Content of Earnings and Cash Flows from Operations Affected by Their Extremity

Previous returns studies have shown that extreme earnings and extreme cash flows from operations are less informative than moderate (i.e., less extreme) earnings and moderate cash flows. Studies also report that cash flows supplement to earnings in firm valuation by showing a higher association of cash flows with returns when earnings are extreme than when earnings are moderate. We propose that this supplementary role of cash flows is affected by cash flows extremity. Using data from the US capital markets, we find that the supplementary role of cash flows exists only when cash flows are not extreme. We also investigate the supplementary role of earnings to cash flows and search for a higher association of earnings with returns when cash flows are extreme than when cash flows are moderate. Similar to results on cash flows, our findings show that the supplementary role of earnings exists only when earnings are not extreme. Our results imply that investors and researchers should consider both earnings and cash flows extremity when assessing the information content of these variables.     

The Association Between Operating Cash Flows and Dividend Changes: An Empirical Investigation

The Association between earnings and dividend changes has been established since Lintner's (1956) pioneering work. Subsequent research attempted to establish an association between operating cash flows and dividend changes, given earnings, without success (Simons, 1994). Recently, there has been increased attention in cash flow reporting. Regulatory bodies worldwide have stressed the significance of cash flow information in capital markets. Research on the association between cash flows and dividends has been limited, yielding inconclusive results. The purpose of this study is to re-evaluate and extend prior studies by examining the incremental ability of cash flows to explain dividend changes, given earnings. We argue that a positive relationship between cash flows and dividend changes should exist due to liquidity and accruals management considerations. The empirical evidence of this study supports that the dividend changes-cash flow relationship is significantly positive (a) when operating cash flows are low compared to earnings, and (b) when firm growth is moderate.     

Expected Accrual Models: The Impact of Operating Cash Flows and Reversals of Accruals

This paper augments the Jones (1991) model with operating cash flows and lagged accruals to evaluate the impact of (1) the negative association between accruals and concurrent cash flows, (2) the positive association between accruals and lagged cash flows, and (3) the reversal of accruals. I find that operating cash flows greatly improve the explanatory and predictive power of the Jones model; but, lagged accruals do not. A market test of the expected and unexpected components of accruals indicates that unexpected accruals are on average informative with respect to concurrent stock returns; however, the market does not fully understand the implications of accruals anticipated at the beginning of the return period.This paper has benefited from helpful comments and suggestions from Tae Hee Choi, In-Kyu Moon, and two anonymous reviewers on earlier versions of this paper. The author gratefully acknowledges the financial support from the Queens School of Business.     

Impact of Earnings,Dividends and Cash Flows on Stock Returns: Case of Taiwan's Stock Market

The study uses Taiwan's stock market, a newly developed market with different characteristics from that of the U.S., as an experimental case to examine the influences of the market's characteristics on the relationship between stock returns and fundamental accounting information, such as earnings, dividends and cash flows. The testing period is from 1990 to 1994, right after the promulgation of Taiwan's accounting standard for statement of cash flows in 1989.Similar to the findings of U.S. studies, the study shows that earnings data is key information for investors. Unlike the U.S. results, however, both operating income and non-operating income are positively related to stock returns. The usefulness of non-operating income to explain stock returns is due mainly to its recurrent characteristic in Taiwan. The market views non-operating income, mostly from disposal of real-estate and short-term equity investments, as a complementary factor to operating income. It is a possible common phenomenon in a booming economy. Unlike from the results of U.S. studies, Taiwan's stock returns are strongly associated with stock dividends. Cash dividends, however, are relatively less important information to the market. The fast booming economy as well as Taiwan's free tax rate on capital gains are the explanations for the different findings. The results also support McNicholes and Dravid's (1990) and etc. results that stock dividends may act as a signal for favorable future earnings. Examining the association between stock returns and cash flow information, the results indicate that stock returns are positively associated with cash flows from both operating and financing activities. The phenomenon implies that the market appreciates not only the cash inflows from operating activities, but also cash inflows from new issues of bonds or stocks for further expansion. It is consistent to Taiwan's booming economy. The finding also supports Ross (1977) and Leland and Pyles' (1977) signaling hypothesis.The study concludes that the relationships between stock returns and fundamental variables are subject to the market's characteristics. The case of the Taiwan stock market shows that usefulness of accounting information depends upon the different roles of the information in the tested market. The results of the study also indicate that directly applying the U.S. experiences without any adjustment may cause incorrect conclusions for empirical studies.     

The Persistence and Pricing of the Cash Component of Earnings

Prior research shows that the cash component of earnings is more persistent than the accrual component. We decompose the cash component into: (1) the change in the cash balance, (2) issuances/distributions to debt, and (3) issuances/distributions to equity. We find that the higher persistence of the cash component is entirely due to the subcomponent related to equity. The other subcomponents have persistence levels almost identical to accruals. We investigate whether investors understand the implications of the differential persistence of the three subcomponents. Our results suggest that investors correctly price debt and equity issuances/distributions but misprice the change in the cash balance in a similar manner to accruals. Our tests enable us to empirically distinguish the “accrual” and “external financing” anomalies with results implying that the accrual anomaly subsumes the external financing anomaly. Our results also suggest that naive fixation on earnings is unlikely to be a complete explanation for the accrual anomaly. Our findings are more consistent with investors misunderstanding diminishing returns to new investments.     

盈余公告后债券价格反应对股票未来回报的预测研究

本文研究了我国A股上市公司发布盈余公告后,债券价格反应对于关联股票未来回报的预测能力。研究发现,盈余公告前1日至后1日债券收益率的变动可以预测公告公布后窗口期为20日的股票持有超额累计回报;实证结果显示,这种预测能力不会因为盈余信息的好坏而存在显著的差异;最后基于似无相关模型SUR的检验后,发现上市公司的机构持股比例越低,债券价格反应对于股票回报的预测能力越强。本文研究表明,我国被富有经验的投资者所主导的债券市场中债券价格相对于股票价格会更迅速地吸收消化盈余公告信息。     

会计盈余、现金流量的价值相关性实证研究基于沪深股市的实证证据

已有的研究结果说明会计盈余具有价值相关性。从盈余等于经营现金流量与应计利润之和这一新的视角切入，以实证的方法对沪深两地上市的A股公司进行三大样本检验。并通过建立股票报酬与应计利润和现金流量的回归方程，利用应计利润回归系数的显著性对会计盈余与现金流量的价值相关性做比较，结果表明，会计盈余的价值相关性要大于现金流量的价值相关性。     

The Equilibrium Valuation of Risky Discrete Cash Flows in Continuous Time

This paper values a contingent claim to discrete stochastic cash flows generated by a Poisson arrival process with a randomly varying intensity parameter. In the most general case, both the size and the arrival intensity of cash flows may correlate wih state variables in a continuous time economy. Assuming the conditions of an intertemporal capital aset pricing model, solutions for the value of the contingent claim can be found using various techniques. The paper suggests immediate applications to the valuation of insurance contracts, the decision to build a firm with unknown future investment opportunities, and the pricing of mortgage-backed securities.     

Do Stock Prices of Property Casualty Insurers Fully Reflect Information about Earnings,Accruals, Cash Flows,and Development?

This paper examines whether the stock prices of property and casualty (P&C) insurers fully reflect information contained in earnings, cash flows and accruals, and one particular accrual—development of loss reserves. The reserve for policy losses is a major accrual for P&C firms, requires substantial judgment and is the subject of unique disclosures that reveal the ex post error in management estimates. We find that investors underestimate the persistence of cash flows and overestimate the persistence of accruals for P&C insurers, but our evidence suggests the market does not underestimate the persistence of the development accrual.     

The Predictive Ability of Direct Method Cash Flow Information

This research examines the predictive ability of direct method cash flow information for firms that use the direct method in their cash flow statements. We use cross sectional and pooled time series regressions to predict operating cash flow data and assess relative predictive ability. Principal findings are: (1) past period direct method cash flow data predict future operating cash flow better than indirect method cash flow data; (2) past period direct method gross operating cash flows predict future net operating cash flow better than past period net operating cash flow; (3) measurement error exists in estimates of direct method operating cash flows from other financial statement data; (4) past operating cash flows predict future operating cash flows better than earnings and accruals.     

十载磨砺,铸东莞金融奇葩

有这样一家银行,它成立于1999年,在14家城市信用合作社和19家独立核算营业部的基础上组建而成,历经十年发展,如今已发展成为范珠三角财务指标排名前列的领军银行;它位于中小企业密集、中国制造业重镇的东莞,十年耕耘,现已发展成为专注服务中小企业的区域性商业银行;它成立于亚洲经济危机的背景之下,十年磨砺之后,已成为一家风险管控良好的优质银行,在此次危机中方能把握宏观经济形势,善调信贷政策,助推本地经济复苏,这家银行便是东莞银行.