Additional Evidence on the Incremental Information Content of Cash Flows and Accruals: The Impact of Errors in Measuring Market Expectations
Ray J. Pfeiffer Jr.
Texas Christian University - Neeley School of Business
Pieter T. Elgers
University of Massachusetts
May H. Lo
Western New England College
Lynn L. Rees
Texas A&M University - Department of Accounting
The Accounting Review, July 1998
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.
JEL Classification: M41, G12Accepted Paper Series
Date posted: February 2, 1999
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