A Study on Relationship between Earnings Before Tax, Interest and Operational Cash Flows with Stockholders’ Equity

Management Science Letters 4 (2014) 1699-1706

8 Pages Posted: 3 Aug 2014

See all articles by Mohammad Reza Karimi Torghabeha

Mohammad Reza Karimi Torghabeha

Islamic Azad University (IAU) - Torbate-Jam Branch

Dr.Hossein Parsian

Plan and Budget organization of Iran

Amir Shams Koloukhi

Islamic Azad University - Young Researchers and Elites Club

Date Written: July 12, 2014

Abstract

One of the primary economic issues is associated with optimum resource allocation in profitable investments with reasonable risk. For this purpose, performance measurement’s criteria are needed some of which emphasize cash flow variables and some others focus on information content of accounting profit. On this basis, this study examines the relationship between earnings before tax and interest and operational cash flows with stockholders’ return in Tehran Stock Exchange (TSE). In this regard, information asymmetry was also examined. To test hypotheses, multivariable regression and combined data method were used. The results showed that based on the information of 102 companies in stock market from 2004 to 2009, there was a positive and significant correlation between earnings before interest and tax and stock return in the companies. While, operational cash flow has no significant impact on stock return. Increasing information asymmetry, earnings before interest and tax has a positive and significant correlation with stockholders ’return; but operational cash flow has no significant effect on stockholders’ return. In other words, earnings before interest and tax have higher information content than operational cash flow.

Keywords: Information asymmetry, Accruals, Operational cash flow, Stockholders’ return

JEL Classification: G10, M00

Suggested Citation

Karimi Torghabeha, Mohammad Reza and Parsian, Hossein and Shams Koloukhi, Amir, A Study on Relationship between Earnings Before Tax, Interest and Operational Cash Flows with Stockholders’ Equity (July 12, 2014). Management Science Letters 4 (2014) 1699-1706. Available at SSRN: https://ssrn.com/abstract=2475335

Mohammad Reza Karimi Torghabeha

Islamic Azad University (IAU) - Torbate-Jam Branch ( email )

No.1, Zakaria Shomali 7, Piroozi Street.
Mashhad
Iran

Hossein Parsian (Contact Author)

Plan and Budget organization of Iran ( email )

Tehran, Tehran
Iran

Amir Shams Koloukhi

Islamic Azad University - Young Researchers and Elites Club ( email )

Torbat-e-Jam Branch
Torbat-e-Jam
Iran

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