Is Cash Flow King in Valuations?

Posted: 19 Apr 2007

See all articles by Jing Liu

Jing Liu

The Cheung Kong Graduate School of Business

Doron Nissim

Columbia University - Columbia Business School

Jacob K. Thomas

Yale School of Management

Abstract

Contrary to the common perception that operating cash flows are better than accounting earnings at explaining equity valuations, recent studies suggest that valuations derived from industry multiples based on reported earnings are closer to traded prices than those based on reported operating cash flows. The question addressed in the article is whether the balance tilts in favor of cash flows when the following are considered: (1) forecasts rather than reported numbers, (2) dividends rather than operating cash flows, (3) individual industries rather than all industries combined, and (4) companies in non-U.S. markets. In all cases studied, earnings dominated operating cash flows and dividends.

Keywords: Equity Investments, Fundamental Analysis and Valuation Models, Industry Analysis

JEL Classification: G12, G14, G32, G35, M41

Suggested Citation

Liu, Jing and Nissim, Doron and Thomas, Jacob Kandathil, Is Cash Flow King in Valuations?. Financial Analysts Journal, Vol. 63, No. 2, pp. 56-65, 2007. Available at SSRN: https://ssrn.com/abstract=980679

Jing Liu (Contact Author)

The Cheung Kong Graduate School of Business ( email )

1 East Changan Avenue, Oriental Plaza
E3/3F
Beijing
China

Doron Nissim

Columbia University - Columbia Business School ( email )

3022 Broadway
604 Uris Hall
New York, NY 10027
United States
212-854-4249 (Phone)

Jacob Kandathil Thomas

Yale School of Management ( email )

135 Prospect Street
P.O. Box 208200
New Haven, CT 06520-8200
United States

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