FASB was Right: Earnings Beat Cash Flows when Predicting Future Cash Flows

66 Pages Posted: 11 Sep 2020 Last revised: 31 Dec 2020

See all articles by Ray Ball

Ray Ball

University of Chicago - Booth School of Business

Valeri V. Nikolaev

University of Chicago Booth School of Business

Date Written: December 29, 2020

Abstract

Do accruals-based accounting earnings provide better information to investors about future operating cash flows than operating cash flows themselves, as predicted by FASB’s conceptual framework? The most recent evidence (Nallareddy et al., 2020) is that operating cash flows, measured correctly using cash flow statement data, consistently outperform earnings. However this evidence compares operating cash flows with “bottom line” earnings, handicapping earnings by including non-operating and transitory components with no corresponding operating cash flow. Operating earnings consistently dominate operating cash flow’s predictive ability in a battery of tests, especially after addressing cross-sectional differences among firms.

Keywords: Operating Cash Flow, forecasts, predictive ability, earnings, FASB, accruals, informativeness

JEL Classification: G11, G12, G17, M41, M48

Suggested Citation

Ball, Ray and Nikolaev, Valeri V., FASB was Right: Earnings Beat Cash Flows when Predicting Future Cash Flows (December 29, 2020). Chicago Booth Research Paper No. 20-23, Available at SSRN: https://ssrn.com/abstract=3689802 or http://dx.doi.org/10.2139/ssrn.3689802

Ray Ball

University of Chicago - Booth School of Business ( email )

Valeri V. Nikolaev (Contact Author)

University of Chicago Booth School of Business ( email )

5807 South Woodlawn Avenue
Chicago, IL 60637
United States

HOME PAGE: http://faculty.chicagobooth.edu/valeri.nikolaev/index.html

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