Earnings, Cashflows and Returns: Functional Relations and the Impact of Firm Size

Posted: 25 Aug 2000

See all articles by Peta Stevenson-Clarke

Peta Stevenson-Clarke

Griffith University - Dept of Accounting, Finance and Economics

Allan Hodgson

University of Queensland - Faculty of Business, Economics and Law; Financial Research Network (FIRN)

Abstract

The relation between stock returns, earnings and cashflows is of importance because it directly addresses the issue of whether accounting data provide value relevant information. The empirical evidence to date, however, has documented low explanatory power for earnings and inconclusive incremental information content for cashflows. This research re-evaluates the incremental information content debate using Australian data. Our research is motivated by: recent innovations in research design, including the specification of nonlinear functional relations between accounting variables and prices, and the fact that differences in firm size characteristics may influence the relative information content of the accounting variables. We observe that: (i) a nonlinear functional relation provides greater explanatory power for both earnings and cash flows; (ii) the results are consistent with more transitory earnings components for smaller firms; and (iii) contrary to received theory, cashflows add greater incremental explanatory power for large firms.

JEL Classification: M41, G12, G14, M44

Suggested Citation

Stevenson-Clarke, Peta and Hodgson, Allan C., Earnings, Cashflows and Returns: Functional Relations and the Impact of Firm Size. Available at SSRN: https://ssrn.com/abstract=232392

Peta Stevenson-Clarke

Griffith University - Dept of Accounting, Finance and Economics ( email )

Kessels Road
Nathan, Queensland 4111
Australia
+61 7 373 53547 (Phone)
+61 7 373 57760 (Fax)

Allan C. Hodgson (Contact Author)

University of Queensland - Faculty of Business, Economics and Law ( email )

4072 Brisbane, Queensland
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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