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Author: Mary E. Barth Publisher: ISBN: Category : Languages : en Pages : 64
Book Description
Our model, which is adapted from Feltham and Ohlson (1995) and Ohlson (1995) and extends Dechow and Dichev (2002), characterizes the information about future cash flows reflected in accruals. The model reveals that investors can extract from accruals information about next period's economic factor and the transitory part of one component of next period's cash flow. The extent to which each accrual provides this information depends on whether the accrual's role is to align future or past cash flows and current period economics and whether the accrual relates to the current or prior period. Thus, each type of accrual has a different coefficient in valuation, forecasting future cash flows, and forecasting earnings. Each coefficient combines an information weight reflecting the information that accrual type provides and a multiple reflecting how that information is used in valuation and cash flow and earnings forecasting. The empirical evidence supports the main insight we obtain from the model, namely that partitioning accruals based on their role in the cash flow alignment process increases the ability of accruals to forecast future cash flows and earnings and to explain firm value.
Author: Mary E. Barth Publisher: ISBN: Category : Languages : en Pages : 64
Book Description
Our model, which is adapted from Feltham and Ohlson (1995) and Ohlson (1995) and extends Dechow and Dichev (2002), characterizes the information about future cash flows reflected in accruals. The model reveals that investors can extract from accruals information about next period's economic factor and the transitory part of one component of next period's cash flow. The extent to which each accrual provides this information depends on whether the accrual's role is to align future or past cash flows and current period economics and whether the accrual relates to the current or prior period. Thus, each type of accrual has a different coefficient in valuation, forecasting future cash flows, and forecasting earnings. Each coefficient combines an information weight reflecting the information that accrual type provides and a multiple reflecting how that information is used in valuation and cash flow and earnings forecasting. The empirical evidence supports the main insight we obtain from the model, namely that partitioning accruals based on their role in the cash flow alignment process increases the ability of accruals to forecast future cash flows and earnings and to explain firm value.
Author: Nikolay Draganov Publisher: GRIN Verlag ISBN: 3346463400 Category : Business & Economics Languages : en Pages : 62
Book Description
Master's Thesis from the year 2021 in the subject Business economics - Accounting and Taxes, grade: 1,0, University of Cologne, language: English, abstract: The primary aim of this study is to empirically examine the relative ability of accounting earnings and cash flow to predict future cash flow. Moreover, the role of accruals in cash flow predictions is called into question. One of the major purposes of financial reporting consists in ensuring an informational basis that helps investors, creditors and other users of accounting data to overcome the uncertainty associated with the future cash flows of enterprises their financial activity relates to. At the same time, the accrual concept prevails in modern accounting, since it is theorized to mitigate the mismatching and timing problems of the unrefined cash ba-sis accounting. Hence, recognizing revenues and expenses in the period when they have occurred, and not when cash was received or paid out, should create a more relevant framework for decision making. The use of accrual accounting earnings as a summary measure of financial performance instead of the more primitive cash flows is therefore advocated by accounting standard setters. For instance, the Financial Accounting Stand-ard Board claims that: “Information about enterprise earnings and its components measured by accrual accounting generally provides a better indica-tion of enterprise performance than information about current cash receipts and pay-ments”. The FASB’s statement led to a rising discussion in the financial research on whether accounting earnings provide a more reliable picture of a company’s future operating cash flows than current operating cash flows themselves do. Hence, a major implication of the above quotation refers to the incremental power of accruals and its components in predicting future cash flows beyond the one contained into current operating cash flows. This debate represents a cornerstone in evaluating the information quality offered by the accrual accounting concept.
Author: Aliasghar Mottaghi Publisher: ISBN: Category : Languages : en Pages :
Book Description
This study investigates the predictive ability of current and past cash flows with respect to the estimation of future cash flow, and compares this predictive ability with that of current and past earnings. Future cash flow is estimated in this study on the basis of a model hierarchy that initially incorporates aggregated predictors and then their disaggregated components, with the objective of improving on conventional research design with respect to the problematic issues surrounding missing values in source databases, extreme values in the sampled data and variability in fiscal year length. In determining whether the disaggregation of earnings into cash flow, accruals and their components adds to the predictive ability of cash flow, the present thesis also documents out-of-sample accuracy tests for the UK based on initial in-sample estimations, with accruals being computed using both the information in the Statement of Cash Flows and the information that may be derived from Balance Sheet changes. Using the information in the Statement of Cash Flows, the results of the in-sample estimation indicate that, whilst there is no notable difference between the ability of cash flow and aggregate earnings to predict future cash flow, the disaggregation of earnings into cash flow and accruals improves the prediction. The out-of-sample accuracy tests confirm the standard result that this disaggregated earnings model is a better predictor of future cash flow. In contrast, this thesis shows that, when using information in the Balance Sheet, by way of changes from one period to the next, the results of both the in-sample estimation and the out-of-sample accuracy tests show that disaggregated earnings is unable to outperform aggregate earnings in predicting future cash flow. Nevertheless, when the total accrual is further disaggregated into its deferral and accrual components, in-sample estimation reveals additional improvement in predictive ability, using each of the two sources of information to compute total accruals (the Statement of Cash Flows and Balance Sheet changes), although this is less evident with the out-of-sample tests. Whilst further analysis indicates that disaggregation is more informative when the firm size is large, the magnitude of accruals is low and the firm reports a positive CFO and EBIT, the thesis shows that the ability of the estimation models to predict future cash flow differs across industries in the UK, and that the findings are generally sensitive to the effect of database choice, the fiscal year length, and the identification and treatment of unrecorded data.
Author: Francois Brochet Publisher: ISBN: Category : Languages : en Pages : 55
Book Description
We revisit the role of the cash and accrual components of accounting earnings in predicting future cash flows using out-of-sample predictions, firm-specific regression estimates, and different levels of aggregation of the dependent variable, with market value of equity as a proxy for all future cash flows. We find that, on average, accruals improve upon current cash flow from operations in predicting future cash flows. As accruals' contribution to the prediction of future cash flows varies significantly across firm-quarters, we proceed to investigating determinants of accruals' predictive ability for future cash flows. We find that positive accruals are more likely to improve upon current cash flow in predicting future cash flows. Accruals' contribution is also increasing in cash flow volatility and decreasing in the magnitude of discretionary accruals and of special items. Finally, portfolios formed on stock return predictions using information from current CFO and accruals yield significantly positive returns on average, as opposed to CFO alone. Hence, investors using predictions based on current accounting data to pick stocks are better off taking accruals into account. We also find that Sloan's (1996) accrual anomaly is related to our accrual contribution anomaly. Indeed, when accruals' contribution to future cash flow prediction is the highest, the accrual anomaly vanishes.
Author: Timothy R. Yoder Publisher: ISBN: Category : Languages : en Pages : 45
Book Description
Prior studies on the incremental predictive ability of accrual models over cash flow models with respect to future cash flows have led to conflicting results. This paper presents an accrual-based cash flow prediction model based on a random walk in cash flows adjusted for the reversal of current payables and receivables. Results indicate that this simple accrual model predicts future cash flows (out-of-sample) better than models based on current cash flows alone. This paper also provides a more sophisticated accrual model by extending the model of the accrual process developed by Barth, Cram, and Nelson (2001) to include cash flow implications of growth in future sales. This more sophisticated accrual-based prediction model estimated via WLS (while pooling the prior three years of observations) predicts future cash flows better than both the simple accrual reversal model and the cash flow-based models, indicating that the accrual model contains information about future cash flow beyond the simple mechanical reversal of accruals. One explanation is that accruals may contain information regarding future sales. Consistent with this explanation, the paper finds that the accrual-based WLS model is superior to the cash flow-based model in capturing the effect of future sales on future cash flows. To determine whether the improved forecast accuracy is large enough to affect decision-making by financial statement users, the deciles of firms ranked on forecasted cash flow are compared to the deciles of firms ranked on actual future cash flow. The accrual-based model is superior to the cash flow-based model in placing firms into the correct deciles of actual future cash flow.
Author: Zhaoyang Gu Publisher: ISBN: Category : Languages : en Pages : 47
Book Description
We argue and show that aggregation of accrual components (changes in inventories, changes in accounts payable, changes in accounts receivable and depreciation expense) into total accruals results in a loss of mispricing-related information in individual accrual components. This motivates us to examine whether the recent evidence that operating cash flows subsume the mispricing effect associated with total accruals holds when accruals are disaggregated into accrual components. We find that accrual components are associated with future abnormal returns even after controlling for operating cash flows and growth. The three-day earnings announcement period abnormal returns also support the finding. The evidence with respect to change in accounts payable is especially noteworthy because its inclusion in total accruals reduces the mispricing effects of other components considerably. Overall, the prior evidence that operating cash flows subsume the mispricing effects associated with total accruals is likely caused by the aggregation of accrual components into total accruals. Future research would benefit from focusing on accrual components rather than total accruals.
Author: Joshua Livnat Publisher: ISBN: Category : Languages : en Pages :
Book Description
This study explored the accrual anomaly. The study is unique because it analyzed originally reported - unrestated - quarterly data for 1991 through the first quarter of 2004 to calculate accruals and used U.S. SEC filing dates to identify the day on which investors first obtained information about accruals. The study found that the accrual anomaly exists for quarterly accruals as has been found for annual accruals. Future quarterly earnings were found to be more highly associated with current net operating cash flows than with accruals because accruals have less persistence than cash flows. Companies with extremely high (low) current quarterly accruals have significant and negative (positive) abnormal returns through the subsequent four quarters.
Author: Mary E. Barth Publisher: ISBN: Category : Languages : en Pages : 44
Book Description
We find, as predicted, that the differential ability of accrual and cash flow components of earnings to help forecast future abnormal earnings and the persistence of the components results in the components having different valuation implications. We base our tests on Ohlson (1999) applied to fourteen industries. We find: (1) Accruals and cash flows aid in forecasting future abnormal earnings incremental to abnormal earnings and equity book value. (2) Accruals and cash flows provide explanatory power for equity market value incremental to equity book value and abnormal earnings. (3) There is evidence that accruals and cash flows valuation coefficients are consistent with the Ohlson model.
Author: Mary E. Barth
Author: Mary E. Barth
Author: Nikolay Draganov
Author: Aliasghar Mottaghi
Author: Francois Brochet
Author: Mary E. Barth
Author: Mary E. Barth
Author: Timothy R. Yoder
Author: Zhaoyang Gu
Author: Joshua Livnat
Author: Mary E. Barth