Quarterly Accruals or Cash Flows in Portfolio Construction?

Posted: 11 Sep 2008

See all articles by Joshua Livnat

Joshua Livnat

New York University; Prudential Financial - Quantitative Management Associates

Germán López-Espinosa

University of Navarra

Date Written: September 10, 2008

Abstract

Using quarterly and rolling four-quarter data, this study explores the incremental roles of accruals and net operating cash flows in generating abnormal returns for the full population of U.S. listed companies and specific industries. Quarterly net operating cash flow (OCF) is a stronger signal of the next quarter's returns than are accruals. When rolling four-quarter OCF and accruals were used to construct portfolios held for a whole year, however, OCF dominated accruals only in the first three fiscal quarters. The industry-specific results are consistent with the results for the full population. For most industries, investment managers and financial analysts should focus on OCF more than on accruals.

Keywords: Portfolio Management: Equity Strategies, Equity Investments, Fundamental Analysis and Valuation Models, Industry Analysis, Financial Statement Analysis, Financial and Ratio Analysis

Suggested Citation

Livnat, Joshua and López-Espinosa, Germán, Quarterly Accruals or Cash Flows in Portfolio Construction? (September 10, 2008). Financial Analysts Journal, Vol. 64, No. 3, 2008. Available at SSRN: https://ssrn.com/abstract=1266209

Joshua Livnat (Contact Author)

New York University ( email )

44 West 4th Street, Suite 10-76
Stern School of Business
New York, NY 10012-1118
United States
212-998-0022 (Phone)
212-995-4004 (Fax)

Prudential Financial - Quantitative Management Associates ( email )

2 Gateway Center
6th Fl.
Newark, NJ 07102
United States

Germán López-Espinosa

University of Navarra ( email )

Facultad de Ciencias Económicas y Empresariales
Edificio Amigos
Pamplona, Navarra 31080
Spain
+34 948425600 (Phone)
+34 948425626 (Fax)

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