Corporate Life Cycle and the Value Relevance of Cash Flow Versus Accrual Financial Information

Posted: 28 Jan 2005

See all articles by Joseph Aharony

Joseph Aharony

Tel Aviv University - Faculty of Management; Singapore Management University - School of Accountancy

Haim Falk

The Technion, Israel Institute of Technology

Nir Yehuda

University of Delaware - Accounting & MIS

Date Written: December 31, 2004

Abstract

Motivated by recently renewed criticism of the current accrual accounting model we re-examine the extent to which cash flow and accrual accounting based measures are value relevant, and capable of explaining periodic changes in the firm's market value. Using the R square as a measure of explanatory power, we find that, in general, both cash flow and accrual accounting figures exhibit a low value-relevant level but, depending on the firm's life cycle, the explanatory power of accrual accounting exceeds that of cash flow measures. We also find that the firm's industry affiliation does not affect the cash flow/accrual accounting dominance relations per se. It affects, however, the magnitude of the gap between the R squares measures that pertain to the cash flow figures and those pertaining to their accrual accounting counterpart figures. Implications of our findings for researchers and the valuation of firm's value are also offered in the paper.

Keywords: Cash Flow, Accrual Accounting, Value Relevance

JEL Classification: G14, M41, M14

Suggested Citation

Aharony, Joseph and Falk, Haim and Yehuda, Nir, Corporate Life Cycle and the Value Relevance of Cash Flow Versus Accrual Financial Information (December 31, 2004). Available at SSRN: https://ssrn.com/abstract=655682

Joseph Aharony

Tel Aviv University - Faculty of Management ( email )

69978 Tel Aviv
Israel

Singapore Management University - School of Accountancy ( email )

60 Stamford Road
Singapore 178900
Singapore

Haim Falk

The Technion, Israel Institute of Technology ( email )

Faculty of Industrial Engineering & Management
Haifa 32000
ISRAEL
+972 4 829 4419 (Phone)

Nir Yehuda (Contact Author)

University of Delaware - Accounting & MIS ( email )

Alfred Lerner College of Business and Economics
Newark, DE 19716
United States

HOME PAGE: http://https://lerner.udel.edu/faculty-staff-directory/nir-yehuda/

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