Information Asymmetries and the Value-Relevance of Cash Flow and Accounting Figures – Empirical Analysis and Implications for Managerial Accounting

Problems and Perspectives in Management, Vol. 8, No. 2, 2010

CEFS Working Paper 08-2010

25 Pages Posted: 20 Feb 2010 Last revised: 30 Dec 2010

See all articles by Marc Steffen Rapp

Marc Steffen Rapp

University of Marburg - School of Business & Economics; University of Marburg - Marburg Centre for Institutional Economics (MACIE)

Date Written: April 2, 2010

Abstract

While some of the modern performance measures used in managerial accounting rely on cash flow based figures others try to take advantage of the information content of accounting figures. However, whether the additional information content in the accrual components of earnings improves the internal performance measurement is an open empirical question. To shed light on this question, I examine the correlation between operating cash flows and earnings with firm’s total shareholder returns. Using fixed firm effects regression methods for a large sample of German listed firms covering some 5,000 firm years, the analysis shows that generally operating cash flow and earnings are both positively correlated with total shareholder return. However, with increasing information asymmetry earnings become less correlated with the firm’s stock market performance and operating cash flows dominate earnings in explaining total shareholder return (and vice versa). These results suggest that, the information content of accounting figures is only relevant in settings characterized by low information asymmetries and, thus, there is no one-size-fits-all performance measure for managerial accounting purposes.

Keywords: Accounting figures, performance measures, total shareholder return, managerial accounting

JEL Classification: G32, M21, M40, M46

Suggested Citation

Rapp, Marc Steffen, Information Asymmetries and the Value-Relevance of Cash Flow and Accounting Figures – Empirical Analysis and Implications for Managerial Accounting (April 2, 2010). CEFS Working Paper 08-2010. Available at SSRN: https://ssrn.com/abstract=1555652 or http://dx.doi.org/10.2139/ssrn.1555652

Marc Steffen Rapp (Contact Author)

University of Marburg - School of Business & Economics ( email )

Am Plan 2
Marburg, D-35037
Germany

University of Marburg - Marburg Centre for Institutional Economics (MACIE) ( email )

Am Plan
Marburg, 35032
Germany

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