e-journal

The supplemental role of operating cash flows in explaining share returns

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Purpose – In response to recent concerns on earnings quality and a firm’s fundamental performance,
the purpose of this paper is to re-examine salient questions under accrual accounting: how earnings
quality affects the role of earnings and operating cash flows in a firm’s valuation.
Design/methodology/approach – Using a large sample ranging from 1989 to 2008, the authors
contrast the effects of three representative accrual-based earnings quality measures on the association
between earnings, operating cash flows and a firm’s abnormal stock returns.
Findings – In the univariate analysis it was found that earnings explain returns similarly to
operating cash flows. With control of earnings quality, the results indicate that earnings’ role in
explaining contemporaneous abnormal returns remains unchanged when earnings quality is better.
Conversely, operating cash flows explain more contemporaneous abnormal returns when earnings
quality is better. The findings could suggest that the market reacts to operating cash flows
conditionally on earnings quality. Intriguingly, the results also indicate that the market perceives better
earnings quality captures superior performance of operating cash flows rather than that of earnings.
These findings are further fortified by additional analyses revealing that the earnings quality measure
with control of operating cash flows affects the supplemental role of operating cash flows most.
Originality/value – The paper’s findings provide insights on how the market processes firm value
signals embedded in earnings quality, which have direct implications for regulators, standard setters,
academics and practitioners.

Keywords Accounting, Earnings, Cash flow, Returns, Financial accounting, Operating cash flows,Earnings quality, Firm valuation, United States of America

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Informasi Detail

Judul Seri

International Journal of Accounting and Information Management

No. Panggil

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Penerbit

: Emerald Group., 2013

Deskripsi Fisik

International Journal of Accounting and Information Management Vol. 21 No. 1, 2013 pp. 53-71

Bahasa

English

ISBN/ISSN

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Klasifikasi

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Tipe Isi

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Tipe Media

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Tipe Pembawa

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Edisi

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Subjek

AKUNTANSI

Info Detail Spesifik

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Pernyataan Tanggungjawab

Asmawati/Syahrial

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