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Further Evidence on Empirical Relationships Between Earnings and Cash Flows

Percy, Majella & Stokes, Donald J. (1992) Further Evidence on Empirical Relationships Between Earnings and Cash Flows. Accounting and Finance, 32(1), pp. 27-50.

Abstract

Recently in Australia, regulations have been proclaimed requiring companies to make cashflow disclosures in addition to earnings disclosures from 30 June 1992. This paper provides evidence on relationships between earnings and cash flow measures and in so doing examines the external validity of a U.S.A study of these relationships by Bowen, Burgstahler and Daley [1986]. We also extend their study through an industry analysis of the relationships. Evidence is presented first that shows low correlations between traditional cash flow measures (i.e., net income plus depreciation and amortisation; and working capital from operations) and a more refined cash flow measure (with additional adjustments for changes in non-cash current assets and current liabilities). Second, traditional cash flow measures exhibit high correlations with earnings, while the more refined cash flow measure has a lower correlation with earnings. Finally, traditional cash flow measures better predict future cash flows than models based on earnings or a more refined cash flow meaure. The industry evidence, albeit on small sample sizes, shows that the results on the first two issues, but not the latter issue, are generalisable across industry categories.

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ID Code: 2028
Item Type: Journal Article
Additional URLs:
Keywords: cash flows, cash flow measures, earnings
ISSN: 1467-629X
Subjects: Australian and New Zealand Standard Research Classification > COMMERCE MANAGEMENT TOURISM AND SERVICES (150000) > ACCOUNTING AUDITING AND ACCOUNTABILITY (150100)
Divisions: Current > QUT Faculties and Divisions > QUT Business School
Copyright Owner: Copyright 1992 Blackwell Publishing
Copyright Statement: The definitive version is available at www.blackwell-synergy.com
Deposited On: 23 Aug 2006
Last Modified: 05 Jan 2011 23:25

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