Abstract

https://ssrn.com/abstract=2472571
 


 



Are Cash Flows Better Stock Return Predictors than Profits?


Stephen R. Foerster


University of Western Ontario - Richard Ivey School of Business

John Tsagarelis


Primes Corporation

Grant Wang


Highstreet Asset Management

January 5, 2017

Financial Analysts Journal, Forthcoming

Abstract:     
Although various income statement–based measures predict the cross section of stock returns, direct method cash flow measures have even stronger predictive power. We transform indirect method cash flow statements into disaggregated and more direct estimates of cash flows from operations and other sources and form portfolios on the basis of these measures. Stocks in the highest-cash-flow decile outperform those in the lowest by over 10% annually (risk adjusted). Our results are robust to investment horizons and across risk factors and sector controls. We also show that, in addition to operating cash flow information, cash taxes and capital expenditures provide incremental predictive power.

Number of Pages in PDF File: 46

Keywords: direct cash flow method, cash flows, profitability, stock return predictability

JEL Classification: G10, G14


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Date posted: July 28, 2014 ; Last revised: January 7, 2017

Suggested Citation

Foerster , Stephen R. and Tsagarelis, John and Wang, Grant, Are Cash Flows Better Stock Return Predictors than Profits? (January 5, 2017). Financial Analysts Journal, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2472571 or http://dx.doi.org/10.2139/ssrn.2472571

Contact Information

Stephen R. Foerster (Contact Author)
University of Western Ontario - Richard Ivey School of Business ( email )
1255 Western Road
London, Ontario N6G 0N1
Canada
519-661-3726 (Phone)
519-661-3485 (Fax)
John Tsagarelis
Primes Corporation ( email )
United States
Grant Wang
Highstreet Asset Management ( email )
244 Pall Mall Street
London, Ontario N6A 5P6
Canada
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