The Value-Relevance of Cash Flows and Accruals: the Role of Investment Opportunities
60 Pages Posted: 7 Sep 2004 Last revised: 9 Jan 2008
Abstract
We examine the role of investment opportunities as a determinant of the relative importance of cash flows from operations (CFO) and accruals in firm valuation. We find that at low investment-opportunity levels, CFO value-relevance increases with investment opportunities. When investment opportunities are high, accrual value-relevance declines as investment opportunities increase. Consequently, earnings value-relevance first varies directly and then inversely with investment opportunities. We show that the increase in CFO value-relevance is consistent with cost differentials between internal and external financing causing CFO to be an increasingly important determinant of the realization of investment opportunities. The decline in accrual value-relevance at high investment-opportunity levels appears to be attributable to accounting measurement deficiencies.
Keywords: Capital markets, investment opportunities, earnings, cash flows from operations, accruals, value relevance
JEL Classification: G12, M41, G14, G29
Suggested Citation: Suggested Citation
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