Earnings versus Cash Flows in Predicting Future Cash Flows: Evidence From Egypt and KSA

Abstract

This study examines the role of accrual based earnings derived from accrual accounting basis in comparison with cash flows in the prediction of future operating cash flows of quoted non￾ financial companies in Egypt and Saudi Arabia . Using a sample of 55 Egyptian companies and 35 Saudi companies over a period of 5 years (2015 – 2019) and employing the OLS regression analysis, the results suggest that both earnings and cash flows have predictive ability in predicting future operating cash flows in both countries. However, the results show that cash flows are a better predictor of future operating cash flows than earnings in both countries. Our study findings are in contrast to the assertion of Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB) that earnings are a better predictor of future cash flows.

Keywords: accrual based earnings; accrual accounting basis; cash flows; future operating cash flows; predictive ability