Which is More Value-Relevant: Earnings or Cash Flows?

50 Pages Posted: 2 Sep 1998

Date Written: May 1998

Abstract

Statements in the financial press and recent research suggest that controversy exists as to which accounting measure is more value-relevant: earnings or cash flows. This study examines the relative value-relevance of earnings and cash flow measures in the context of the firm life-cycle. Earnings are predicted to be more value-relevant in mature stages. Cash flows are expected to be more value relevant in stages characterized by growth and/or uncertainty. In general the hypotheses are supported using Wald chi-square tests (Biddle, Seow, and Siegel 1995) of the Edwards, Bell, Ohlson (1995) model. Evidence supports the hypothesis that earnings are more value-relevant than operating, investing, or financing cash flows in mature life-cycle stages. However, in the start-up stage investing cash flows are more value relevant than earnings. In growth and decline stages, operating cash flows are more value relevant than earnings.

JEL Classification: M41, M44, G12

Suggested Citation

Black, Ervin L., Which is More Value-Relevant: Earnings or Cash Flows? (May 1998). Available at SSRN: https://ssrn.com/abstract=118089 or http://dx.doi.org/10.2139/ssrn.118089

Ervin L. Black (Contact Author)

Steed School of Accounting ( email )

307 W Brooks
Norman, OK 73019
United States
405-325-2401 (Phone)

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