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Abstract:
We revisit the role of the cash and accrual components of accounting earnings in predicting future cash flows using out-of-sample predictions, firm-specific regression estimates, and different levels of aggregation of the dependent variable, with market value of equity as a proxy for all future cash flows. We find that, on average, accruals improve upon current cash flow from operations in predicting future cash flows. As accruals' contribution to the prediction of future cash flows varies significantly across firm-quarters, we proceed to investigating determinants of accruals' predictive ability for future cash flows. We find that positive accruals are more likely to improve upon current cash flow in predicting future cash flows. Accruals' contribution is also increasing in cash flow volatility and decreasing in the magnitude of discretionary accruals and of special items. Finally, portfolios formed on stock return predictions using information from current CFO and accruals yield significantly positive returns on average, as opposed to CFO alone. Hence, investors using predictions based on current accounting data to pick stocks are better off taking accruals into account. We also find that Sloan's (1996) accrual anomaly is related to our accrual contribution anomaly. Indeed, when accruals' contribution to future cash flow prediction is the highest, the accrual anomaly vanishes.

accruals, cash flows, cash flow predictions, anomalies

Abstract:
This paper examines the information content of Form 4 filings under the more timely disclosure regime introduced by Section 403 of the Sarbanes-Oxley Act of 2002 (SOX). Abnormal returns and trading volumes around filings of insider stock purchases are significantly greater after SOX than before. Abnormal trading volumes around filings of insider sales are also greater post-SOX on average, but stock returns are not more negative. However, once controlling for pre-planned transactions, reporting lag, litigation risk, and news following insider trades, I also find a negative association between returns around filings of insider sales and SOX. Overall, the evidence suggests that the prompt public disclosures about insider transactions mandated by the new rule are relevant to the pricing of securities. The results are also consistent with SOX and regulatory actions reducing the incentives to sell ahead of privately known negative news.

insider trading, Sarbanes-Oxley Act, information content

Abstract:
This case was written as the financial accounting portion of the final exam for a first-year MBA course at Harvard Business School. The goal was to test students' ability to apply major concepts taught during the course to an industry which they had not covered, but which shared similarities in terms of economics with issues addressed in the curriculum. The company, Tokyo Auto Fire & Marine (hereafter Tokyo AFM), is a fictitious insurance company based in Japan. The new CEO is revisiting the accounting choices of his predecessors in light of changes in the economic environment of the firm. The case can also be taught as a review session.