Changes in Accrual Properties and Operating Environment: Implications for Cash Flow Predictability

Forthcoming, Journal of Accounting and Economics

56 Pages Posted: 18 Oct 2017 Last revised: 18 Feb 2020

See all articles by Suresh Nallareddy

Suresh Nallareddy

Duke University - Fuqua School of Business

Mani Sethuraman

Cornell University

Mohan Venkatachalam

Duke University - Fuqua School of Business

Date Written: February 17, 2020

Abstract

This paper reconciles conflicting evidence in prior literature on the relative ability of earnings and cash flows in predicting future cash flows. Further, we investigate the implications of temporal shifts in accrual properties and operating environment for cash flow predictability. Three key insights emerge. First, cash flows consistently outperform earnings in predicting future cash flows. Second, accruals and its components, including those capturing non-articulating events, have incremental (albeit small) predictive ability over cash flows. Third, earnings’ ability to predict future cash flows has increased over the period 1989-2015, due to changes in operating environment rather than accrual properties.

Keywords: Accrual Accounting; Cash Flow Predictability; Valuation

Suggested Citation

Nallareddy, Suresh and Sethuraman, Mani and Venkatachalam, Mohan, Changes in Accrual Properties and Operating Environment: Implications for Cash Flow Predictability (February 17, 2020). Forthcoming, Journal of Accounting and Economics . Available at SSRN: https://ssrn.com/abstract=3054644 or http://dx.doi.org/10.2139/ssrn.3054644

Suresh Nallareddy (Contact Author)

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States

Mani Sethuraman

Cornell University ( email )

Ithaca, NY 14853
United States

Mohan Venkatachalam

Duke University - Fuqua School of Business ( email )

Box 90120
Durham, NC 27708-0120
United States
919-660-7859 (Phone)
919-660-7971 (Fax)

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