The Ability of Earnings to Predict Future Operating Cash Flows Has Been IncreasingNot Decreasing

28 Pages Posted: 8 May 2006

See all articles by Myungsun Kim

Myungsun Kim

SUNY at Buffalo

William Kross

State University of New York (SUNY) at Buffalo - Department of Accounting

Date Written: 2005-06-24

Abstract

We investigate the relationship between earnings and one-year-ahead operating cash flows from 1973 to 2000. Although the extant research indicates a weakening relationship between contemporaneous earnings and stock prices over time, we find that the relationship between current earnings and future operating cash flows has increased over time. This result holds for numerous divisions of our sample. Out-of-sample predictions of operating cash flows generally show increasing forecast accuracy over time. Increasing accounting conservatism appears to play a role in this phenomenon.

Suggested Citation

Kim, Myungsun and Kross, William, The Ability of Earnings to Predict Future Operating Cash Flows Has Been IncreasingNot Decreasing (2005-06-24). Journal of Accounting Research, Vol. 43, pp. 753-780, December 2005. Available at SSRN: https://ssrn.com/abstract=876688 or http://dx.doi.org/10.1111/j.1475-679X.2005.00189.x

Myungsun Kim (Contact Author)

SUNY at Buffalo ( email )

Buffalo, NY 14260
United States
716-645-7900 (Phone)

William Kross

State University of New York (SUNY) at Buffalo - Department of Accounting ( email )

Buffalo, NY 14260
United States

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