Real earnings management and the relevance of operating cash flows: A study of french listed firms

Abstract

The primary focus of this study is to investigate whether the level of earnings management through real activities (REM)
affects the value relevance of reported cash flows from operations (CFO), precisely with regard to their ability to predict future
CFOs. Using the data related to CAC all tradable listed French firms during 2008 through 2015, we provide evidence which
supports the expected decrease in value relevance of reported CFO for future CFOs’ prediction in the presence of REM. Our
finding highlights the fact that if managers decide to manipulate upward earnings through operating activities, they could
adversely affect the information content of CFOs. More precisely, an aggressive deviation from normal activities leads to
abnormal levels of the main operating inflows and outflows in an inconsistent way and this deteriorates the value relevance
of cash flows from operations. This contribution is of use for creditors and investors and other key CFO users for prediction
purposes as it urges them to make necessary adjustments when predicting the future ability of an entity to generate cash flows.

Keywords: Cash flows from operations · Earnings management · Real activities · Value relevance