Abstract

http://ssrn.com/abstract=55514
 
 

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Evidence on the Relative Usefulness of Accruals and Cash Flows: The Case of Depreciation


Dennis J. Chambers


Kennesaw State University

Ross Jennings


University of Texas at Austin - Department of Accounting

Robert B. Thompson


American University



Abstract:     
Investment professionals often suggest that current accounting earnings can be improved upon as an indicator of share values by substituting capital expenditures for reported depreciation. To provide evidence on the effect of this substitution, we compare the ability of earnings measures based on accrual- and cash-basis accounting for property and equipment to explain the cross-sectional distribution of stock prices for a large sample of manufacturing firms. We find that earnings based on expensing current capital expenditures explains a much smaller fraction of the variation in share prices than earnings based on reported depreciation. This result holds even for stable firms with a relatively smooth year-to-year pattern of capital expenditures.

Number of Pages in PDF File: 37

JEL Classification: M41, G12

working papers series


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Date posted: February 26, 1998  

Suggested Citation

Chambers, Dennis J. and Jennings, Ross and Thompson, Robert B., Evidence on the Relative Usefulness of Accruals and Cash Flows: The Case of Depreciation. Available at SSRN: http://ssrn.com/abstract=55514 or http://dx.doi.org/10.2139/ssrn.55514

Contact Information

Dennis J. Chambers
Kennesaw State University ( email )
1000 Chastain Road
Kennesaw, GA 30144
United States
770-423-6375 (Phone)
770-499-3420 (Fax)
Ross Jennings (Contact Author)
University of Texas at Austin - Department of Accounting ( email )
Austin, TX 78712
United States
512-471-5340 (Phone)
512-471-3904 (Fax)
Robert B. Thompson
American University ( email )
4400 Massachusetts Avenue NW
Washington, DC 20816-8044
United States
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