The Value Relevance of Cash Flows, Current Accruals, and Non-Current Accruals in the UK

41 Pages Posted: 9 Apr 2011

See all articles by Saeed Akbar

Saeed Akbar

University of Liverpool - Accounting and Finance Division

Syed Zulfiqar Ali Shah

University of Warwick - Warwick Business School

Andrew W. Stark

Alliance Manchester Business School, University of Manchester

Date Written: April 7, 2011

Abstract

Cash flow statements have a longstanding history as mandated financial statement disclosures, having replaced funds flow statements. The usefulness of such disclosures with respect to one of the main purposes of financial statements - providing information relevant to the assessment of future cash flows and their uncertainty, and the market value of firms - is still subject to debate. This study investigates whether various partitions of earnings involving combinations of a cash flow measure of performance and measures of current accruals and non-current accruals improve the ability to explain market values in the UK relative to using earnings alone. Using a valuation model-based methodology, and employing a UK sample of non-financial firms for the years 1993 to 2007, our results suggest strong support for the assertion that cash flows can have incremental value relevance relative to either earnings or funds flows. By implication, cash flows can have separate value relevance from total and, in particular, current accruals. There is slightly less consistent evidence that current and non-current accruals can have separate value relevance but, nonetheless, the results are still strongly in favour in this respect. Generally, the main source of increase in explanatory power for market values is the separate inclusion of our cash flow measure in the estimated regressions. As a consequence, we conclude that the statement of cash flows in the UK provides information useful to UK investors in valuing firms. Further, requiring a cash flow statement, as opposed to a funds flow statement, improves the information content of financial statements in the UK.

Keywords: Earnings, Partitions, Cash flows, Accruals, Valuation

JEL Classification: M41

Suggested Citation

Akbar, Saeed and Ali Shah, Syed Zulfiqar and Stark, Andrew W., The Value Relevance of Cash Flows, Current Accruals, and Non-Current Accruals in the UK (April 7, 2011). Available at SSRN: https://ssrn.com/abstract=1805004 or http://dx.doi.org/10.2139/ssrn.1805004

Saeed Akbar (Contact Author)

University of Liverpool - Accounting and Finance Division ( email )

United Kingdom

Syed Zulfiqar Ali Shah

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Andrew W. Stark

Alliance Manchester Business School, University of Manchester ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

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