[Using security return cross-sectional association tests, empirical studies to date have yet to show significant incremental information in total current cost income (including all holding gains) beyond that provided by historical cost income. The theoretical work of Revsine [1973] and others, however, indicates that positive unexpected holding gain information may be good news for some firms but not for others depending on the firms' ability to respond to cost increases. Therefore, if firms differ in their responses to cost changes, cross-sectional studies may be unable to detect an incremental informational effect for total current cost income. The present study provides evidence which supports the existence of such differential responses across firms. A sample of firms reporting SFAS No. 33 data is partitioned based upon past associations of operating income with input cost changes. This association provides an empirical measure of firms' relative abilities to adjust operating flows in response to input cost changes. Statistical tests indicate that such a partition yields significant differences in how equity returns and current cost income are associated.]

Abstract ABSTRACT: Using secure, return cross-sectional association tests, empirical studies to date have yet to show significant Incremental Information In total current cost Income (Including all holding gains) beyond that provided by historical cost Income. The theoretical work of Revsine [1973] and others, however, Indicates that positive unexpected holding gain Information may be good news for some firms but not for others depending on the firms' ability to respond to cost Increases. Therefore, if firms differ in their responses to cost changes, cross-sectional studies may be unable to detect an Incremental Informational effect for total current cost Income. The present study provides evidence which supports the existence of such differential responses across firms. A sample of firms reporting SFAS No. 33 data is partitioned based upon past associations of operating Income with input cost changes. This association provides an empirical measure of firms' relative abilities to adjust operating flows in response to input cost changes. Statistical tests Indicate that such a partition yields significant differences in how equity returns and current cost Income are associated.

Abstract. Given the quantity of nonearnings data disclosed in firms' annual reports, and the many dimensions of performance measured, it is likely that such information is used in establishing equilibrium prices in the market for firms' shares. This study empirically tests the hypothesis that equity price‐relevant information conveyed by annual reports includes several measures other than earnings. The marginal impact of both earnings‐ and nonearnings‐based financial ratios is analyzed and reported. The ratio information is first partitioned into distinct sets using an a priori linear components (LISREL) model. Association tests then show incremental information effects for the earnings‐based ratio set as well as for several nonearnings‐based ratio sets. Résumé. Étant donné la quantité de données étrangères aux bénéfices présentées dans les rapports annuels des entreprises et les nombreuses dimensions sous lesquelles le rendement est mesuré, il est probable que cette information soit utilisée dans l'établissement de prix d'équilibre dans le marché des actions des entreprises. Dans la présente étude, les auteurs procèdent à des vérifications empiriques de l'hypothèse selon laquelle l'information pertinente aux prix relative aux participations que livrent les rapports annuels comporte plusieurs mesures étrangères aux bénéfices. Les auteurs analysent l'incidence marginale tant des ratios financiers basés sur les bénéfices que de ceux qui ne le sont pas, et ils en exposent les résultats. L'information indiciaire est d'abord partagée en jeux distincts à l'aide d'un modèle de composants linéaires a priori. Les tests d'association montrent ensuite les conséquences de l'information marginale pour le jeu des ratios basés sur les bénéfices ainsi que pour plusieurs jeux de ratios qui ne le sont pas.

Abstract Reports on the time-series properties and predictive ability of variables in funds-flow statement. Descriptive evidence that documents the statistical patterns of the cash flow and working capital series for a sample of firms; Measurement of the predictive ability of variables in a funds-flow statement; Security return effects.

Information content, Cash flows from operations, Earnings permanence, Transitory earnings

A number of recent research papers use two-stage procedures in lieu of a single multiple regression, in some cases purportedly as a solution to colinearity among independent variables. We demonstrate that, since collinearity is inherently a data problem rather than a statistical problem, no partitions of dependent or independent variables, orthogonal or otherwise, can provide insights into the relative influence of collinear variables. For the class of linear unbiased estimators this follows directly from the Gauss-Markov Theorem, but we demonstrate some of the results in detail as an aid to interpreting particular papers.

[An accurate description of the process that generates measures of funds flow (cash flow and working capital from operations) has potential importance in a variety of decision contexts. In particular, the issue of cash flow prediction has been central to standard setters. According to Statement of Financial Accounting Concepts No. 1 (FASB 1978, par. 37) "financial reporting should provide information to help investors, creditors, and others assess the amount, timing, and uncertainty of prospective net cash inflows to the related enterprise." Our first objective in this study is to provide descriptive evidence that documents the statistical patterns (e.g., seasonality, autocorrelation) of the cash flow and working capital series for a sample of firms. Although the accounting literature is replete with evidence on the time-series properties of earnings numbers, much less systematic evidence on such properties for cash flow and working capital series is presently available. Our results suggest that the time-series behavior of the cash flow series is in marked contrast to the models typically employed for accounting net income. We also provide evidence that the working capital series behaves similarly to net income. Funds flow is important in the investigation of security price effects, and the association of various measures of funds flow with security returns has been studied by Bernard and Stober (1989), Bowen et al. (1987), Schaefer and Kennelley (1986), and Wilson (1987), among others. These studies have employed cross-sectional expectation models for funds flow measures that restrict coefficients to be the same across firms. We assess the effect of such restrictions on the predictive ability of these models by comparing them with univariate time-series models that permit firm-specific estimation of coefficients. Accordingly, our second objective is to assess the accuracy of forecasts of funds flow variables generated by univariate time-series models versus those obtained from the multivariate cross-sectional models used in prior research (see, e.g., Bernard and Stober 1989; Wilson 1986, 1987). This study provides new evidence on the time-series properties of cash flow and working capital series. The empirical results indicate that the statistical patterns of the cash flow series stand in marked contrast to the well-documented characteristics of quarterly earnings data. Cash flow series are modeled parsimoniously by purely seasonal time-series models. Specifically, we provide descriptive and predictive evidence supportive of the (000)� (100) seasonal Autoregressive Integrated Moving Average (ARIMA) model as a candidate model for predicting cash flow. This model outperforms the multivariate cross-sectional models used in prior research in out-of-sample predictive ability tests. We also present evidence that working capital from operations exhibits time-series behavior virtually identical to that of accounting earnings. This results in identification of ARIMA expectation models quite similar to those popularized for quarterly earnings. Such univariate ARIMA models for working capital dominated cross-sectional regression models in tests of predictive ability.]