Do Core and Non-Core Cash Flows from Operations Persist Differentially in Predicting Future Cash Flows?

Posted: 19 Aug 2007

See all articles by C.S. Agnes Cheng

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance

Dana Hollie

The University of Toledo

Abstract

This study investigates the persistence of cash flow components (core and non-core cash flows) using a cash flow prediction model. By extending the Barth, Cram, and Nelson (2001) model, we examine the role of cash flow components in predicting future cash flows beyond that of accrual components. We propose a cash flow prediction model that decomposes cash flows from operations into core and non-core cash flow components that parallel the presentation and format of operating income from the income statement. Consistent with the AICPA and financial analysts' recommendations, and as predicted, we find that core and non-core cash flows defined in our paper are differentially persistent in predicting future cash flows; and these cash flow components enhance the in-sample predictive ability of cash flow prediction models. We also analyze the association of in-sample prediction errors with earnings, cash flow and accruals variability. We find that disaggregating cash flows improve in-sample prediction, especially for large firms with high cash flows and earnings variability.

Keywords: Cash Flows, Cash Flow Prediction, Core Cash Flows, Cash Flow Variability

JEL Classification: G29, M41, M44

Suggested Citation

Cheng, C.S. Agnes and Hollie, Dana, Do Core and Non-Core Cash Flows from Operations Persist Differentially in Predicting Future Cash Flows?. Review of Quantitative Finance and Accounting, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1006935

C.S. Agnes Cheng

Hong Kong Polytechnic University - School of Accounting and Finance ( email )

M715, Li Ka Shing Tower
Hung Hom, Kowloon, Kowloon
Hong Kong

Dana Hollie (Contact Author)

The University of Toledo ( email )

College of Business and Innovation
Stranahan Hall 3046
Toledo, OH 43606
United States

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