Additional evidence on the incremental information content of cash flows and accruals: the impact of errors in measuring market expectations

Article Abstract:

Unexpected cash flows contain incremental information, consistent with the joint hypotheses that there is incremental information in cash flows and that market expectations impound the measured correlation structure among historical levels of funds-based earnings components. Predictive information in historical serial- and cross-correlations was incorporated among earnings components to determine the relationship between security returns and earnings components. Predictions of the components that are based on measures of historical serial- and cross-dependencies were found to be more accurate than random-walk predictions. Significantly higher valuations of the operating cash flow component of earnings, relative to current accruals, were also found when market expectations are represented by predictions based on past dependencies.

Cash Management, Accrual Accounting, Profits, Corporate profits

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The nature and amount of information in cash flows and accruals

Article Abstract:

An analysis of stock price behavior around the time period when annual reports are released for the period from 1977-1984 was conducted to test past research which stipulated that the stock market reacts positively in proportion to larger cash flows and smaller current accruals. However, no such evidence of this relationship was observed. A further examination of more contextual models of implications regarding accruals and cash flows also was inconclusive in explaining stock price behavior in response to the release of financial statements. Research conclusions indicate that either significant uncertainties about the contexts of detailed annual reports are resolved prior to release to the public, or the security price reactions to cash flow and accrual data are contextually too high to be modeled closely.

Corporation reports, Company reports

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Do stock prices fully reflect information in accruals and cash flows about future earnings?

Article Abstract:

A study was conducted to determine if stock prices are indicative of information in accruals and cash flows about future earnings. This examination involved a sample of 40,679 firm-year observations with the required financial statement and stock price data. Results showed that the persistence of earnings performance depends on the relative magnitudes of the cash and accrual components of earnings. Stock prices, however, behave as if investors focus only earnings, thereby failing to correctly identify the different properties of these two earnings components. Nevertheless, this does not necessarily mean that investors are irrational or that unexploited profit opportunities exist. Recommendations for further studies are provided.

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