The Accounting Review Vol. 83 No. 4 2008
The Value-Relevance of Cash Flows and Accruals: The Role of Investment Opportunities
Abstract
We examine the role of investment opportunities as a determinant of the relative importance of cash flows from operations (CFO) and accruals in firm valuation. We find that at low investment-opportunity levels, CFO value-relevance increases with investment opportunities. When investment opportunities are high, accrual value-relevance declines as investment opportunities increase. Consequently, earnings value-relevance first varies directly and then inversely with investment opportunities. We show that the increase in CFO value-relevance is consistent with cost differentials between internal and external financing causing CFO to be an increasingly important determinant of the realization of investment opportunities. The decline in accrual value-relevance at high investment-opportunity levels appears to be attributable to accounting measurement deficiencies.
- DOI
- 10.2308/accr.2008.83.4.997
- Volume
- 83
- Issue
- 4
- Pages
- 997-1040
- Language
- en
- Sources
- openalex bibtex:phds-export.bib crossref