The Value Relevance of Earnings and Cash Flows: Empirical Evidence for Japan

Posted: 5 Oct 2000

See all articles by Andreas Charitou

Andreas Charitou

University of Cyprus

Colin D. B. Clubb

University of Warwick - Warwick Business School; Imperial College London - Imperial College of Science, Technology and Medicine

Andreas Andreou

C.N.H. Capital Markets Ltd.

Abstract

The Japanese equity market is one of the largest in the world. In recent years, fund managers worldwide have substantially increased their exposure to the Japanese capital markets. In spite of the Japanese capital market's rapid growth and its increasing importance in the international financial world, there has been limited empirical evidence linking security returns to earnings and cash flows. This study extends the growing empirical literature on the association of earnings and cash flows with security returns by using a Japanese dataset consisting of 6,662 firm-year observations for the period 1984-93. We hypothesize that (i) earnings and cash flows are jointly associated with stock returns, and (ii) the association between cash flows (earnings) and security returns increases (decreases) when earnings are transitory. This study provides empirical evidence (i) that cash flows (earnings) have information content beyond earnings (cash flows) in explaining security returns, and (ii) that cash flows (earnings) play a more (less) important role in the marketplace when earnings are transitory. Moreover, results show that the explanatory power of our Japanese models is similar to the evidence provided in prior US studies, indicating that Japanese investors utilize earnings and cash flows in their pricing of equities as their US counterparts.

JEL Classification: M41, M47, G12

Suggested Citation

Charitou, Andreas and Clubb, Colin D. B. and Andreou, Andreas P., The Value Relevance of Earnings and Cash Flows: Empirical Evidence for Japan. As published in Journal of International Financial Management & Accounting, Vol 11, No 1, pp. 1-22, Spring 2000. Available at SSRN: https://ssrn.com/abstract=229968

Andreas Charitou

University of Cyprus ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 2 893624 (Phone)
+357 2 895030 (Fax)

Colin D. B. Clubb (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

Imperial College London - Imperial College of Science, Technology and Medicine ( email )

London, SW7 2AZ
United Kingdom
7-1-589-5111 (Phone)
7-1-823-7685 (Fax)

Andreas P. Andreou

C.N.H. Capital Markets Ltd. ( email )

5 Limassol Avenue
2nd Floor
CY-2112 Nicosia
Cyprus
+357-2-719999 (Phone)

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