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Additional Evidence on the Incremental Information Content of Cash Flows and Accruals: The Impact of Errors in Measuring Market Expectations.

Ray J. Pfeiffer¹; Pieter T. Elgers¹; May H. Lo²; Lynn Rees³

¹ University of Massachusetts Amherst. 1 · ² Western New England College. 2 · ³ Texas A&M University. 3

Abstract This study evaluates the relation between security returns and funds-based earnings components. We document that proxies for market expectations of the components that are based on measures of historical serial- and cross-dependencies are substantially more accurate than random-walk proxies. Moreover, we detect significantly higher valuations of the operating cash flow component of earnings, relative to current accruals, when market expectations are represented using the dependency-based predictions. Such differential valuation is not detectable for random-walk representations. Contrary to results in Ali (1994), we find incremental information in unexpected cash flows over the whole spectrum (moderate and extreme) of unexpected cash flow realizations.

DOI

10.2308/tar-902587

Volume

73 (3)

Pages

373-385

Language

en

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