What Do Accruals Tell Us About Future Cash Flows?

64 Pages Posted: 14 Mar 2016 Last revised: 15 Aug 2016

See all articles by Mary E. Barth

Mary E. Barth

Stanford University - Graduate School of Business

Greg Clinch

Independent

Doron Israeli

IDC Herzliya - Arison School of Business

Date Written: March 1, 2016

Abstract

Our model, which is adapted from Feltham and Ohlson (1995) and Ohlson (1995) and extends Dechow and Dichev (2002), characterizes the information about future cash flows reflected in accruals. The model reveals that investors can extract from accruals information about next period’s economic factor and the transitory part of one component of next period’s cash flow. The extent to which each accrual provides this information depends on whether the accrual’s role is to align future or past cash flows and current period economics and whether the accrual relates to the current or prior period. Thus, each type of accrual has a different coefficient in valuation, forecasting future cash flows, and forecasting earnings. Each coefficient combines an information weight reflecting the information that accrual type provides and a multiple reflecting how that information is used in valuation and cash flow and earnings forecasting. The empirical evidence supports the main insight we obtain from the model, namely that partitioning accruals based on their role in the cash flow alignment process increases the ability of accruals to forecast future cash flows and earnings and to explain firm value.

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

JEL Classification: C51, C53, E37, M41

Suggested Citation

Barth, Mary E. and Clinch, Greg and Israeli, Doron, What Do Accruals Tell Us About Future Cash Flows? (March 1, 2016). Review of Accounting Studies, Vol. 21, Pages 768-807, 2016. Available at SSRN: https://ssrn.com/abstract=2572118 or http://dx.doi.org/10.2139/ssrn.2572118

Mary E. Barth

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States
650-723-9040 (Phone)
650-725-0468 (Fax)

Greg Clinch

Independent

No Address Available

Doron Israeli (Contact Author)

IDC Herzliya - Arison School of Business ( email )

P.O. Box 167
Herzliya, 46150
Israel
+972 9 952 7673 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
1,240
Abstract Views
4,457
rank
15,815
PlumX Metrics