Accounting Earnings, Change in Market Value and Cash Flows

50 Pages Posted: 17 Oct 2015 Last revised: 7 Mar 2016

See all articles by Peter D. Easton

Peter D. Easton

University of Notre Dame - Department of Accountancy

Peter B. Vassallo

University of New South Wales (UNSW) - School of Accounting

Eric H. Weisbrod

University of Kansas - School of Business

Date Written: February 28, 2016

Abstract

Our analyses are based on the observation that the portion of change in enterprise value captured in earnings differs according to the source of value change. These sources are: (1) cash flows to/from debt holders, equity holders, and/or cash reserves; and, (2) changes in value of assets in place (i.e., enterprise returns). We demonstrate that the effect on earnings of each source of growth captures distinct aspects of accounting conservatism. Although the effect of cash flows on earnings has received little attention in the extant literature, we show that it explains more of earnings than is explained by enterprise returns. We show that the difference in the portion of negative cf. positive enterprise returns captured in current earnings is similar to the portion of negative cf. positive equity returns reported in the extant literature. We also demonstrate an interaction between the sign of returns and cash flows.

Keywords: Accounting Conservatism, Firm Growth, Free Cash Flows, Earnings Return Relation

Suggested Citation

Easton, Peter D. and Vassallo, Peter B. and Weisbrod, Eric H., Accounting Earnings, Change in Market Value and Cash Flows (February 28, 2016). Available at SSRN: https://ssrn.com/abstract=2674588 or http://dx.doi.org/10.2139/ssrn.2674588

Peter D. Easton

University of Notre Dame - Department of Accountancy ( email )

Mendoza College of Business
Notre Dame, IN 46556-5646
United States
574-631-6096 (Phone)
574-631-5127 (Fax)

Peter B. Vassallo

University of New South Wales (UNSW) - School of Accounting ( email )

Room 3101, Level 3
Quadrangle Building
Sydney, NSW 2052
Australia

Eric H. Weisbrod (Contact Author)

University of Kansas - School of Business ( email )

1300 Sunnyside Avenue
Lawrence, KS 66045
United States

HOME PAGE: http://https://business.ku.edu/eric-weisbrod

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