The Effect Of Accounting Regime Characteristics On The Prediction Of Future Cash Flows: An International Comparison

Abstract

For nine countries, we show that the components of accrual accounting earnings provide information incremental to that of current cash flows from operations in explaining next years cash flows from operations. We relate the usefulness of accounting earnings components for explaining near-term cash flows to certain country characteristicscommon/code-law jurisdiction, accrual index, shareholders rights, and uncertainty avoidance. We provide evidence that accounting accruals generated by shorter horizon, code-law regimes provide more incremental explanatory power for short-term predictions than those of longer horizon, common-law countries.

Accruals and the prediction of future cash flows

“…These results are consistent with those have documented in some prior studies in developed markets (Kim and Kross, 2005; Murdoch and Krause, 1990; Greenberg et al , 1986) and could support the superiority of earnings as a summary measure of firm performance in Egypt. The findings of the study also support those have documented in Hollister et al (2008)' study. Hollister et al (2008) examine the predictive abilities of earnings and cash flows for future cash flows in nine countries and find that for predicting next period's cash flows, accruals from code‐law regimes provide more explanatory power than those from regimes based in common‐law jurisdictions.…”

“…The findings of the study also support those have documented in Hollister et al (2008)' study. Hollister et al (2008) examine the predictive abilities of earnings and cash flows for future cash flows in nine countries and find that for predicting next period's cash flows, accruals from code‐law regimes provide more explanatory power than those from regimes based in common‐law jurisdictions. Finally, and consistent with prior research in developed markets (Al‐Attar and Hussain, 2004; Hollister et al , 2002; Barth et al , 2001; Dechow et al , 1998), the results reveal that disaggregating earnings into cash flow and the components of accrual enhances earnings' predictive ability relative to aggregate earnings for predicting future cash flow from operations in Egypt.…”

Comparative Predictive Abilities of Earnings and Operating Cash Flows on Future Cash Flows: Empirical Evidence from Ghana

“…These suggest that 1% change in past earnings causes about 51.42%, 41.08% and 31.71% changes in the future operating cash flows of the firms respectively. This significant positive relationship between earnings (EARN t-1 ) and future operating cash flows (CFO t ) confirms the validity of the findings of Accounting Standard Setters (IASB and FASB) and prior studies (Dechowet al, 1998;Barth et al, 2001;Al-Attarand Hussain, 2004;Kim and Kross, 2005;Hollister et al, 2008;Jordan, 2010;Ebaid, 2011;Chong, 2012), suggesting that accounts prepared on accrual basis resulting in earnings (EARN t-1 ) are able to assist investors in predicting future cash flows of their investment over a one year horizon. However, we report insignificant positive relationship between past earnings and future operating cash flow of the listed firms for the second and third lags of past earnings.…”

“…Following Barth et al (2001), Al-Altar and Hussain (2004), Chotkunakitti (2005), Habib (2010), Ebaid (2011), Chong (2012 we use Ordinary Least Squares to estimate the likely influence of the three-lags of operating cash flows and earnings ratios on future operating cash flows of the listed firms. The variables were scaled by the average total assets of the firms to eliminate the effects of size and heteroskedasticity problems (Anderson, Woodhouse, Ramsay and Faff, 2007;Hollister, Shoaf, and Tully 2008;Ebaid, 2011;Chong, 2012). The econometric regression model is of the form;…”

Value relevance of accounting data and financial crisis in Europe: an empirical analysis

“…the -nested‖ model is superior, in term of explained variance, to the -full‖ model 2 . The F-test is specified 1 A methodology based on nested regression models and F-tests been already used by Cheng et al (1993) to evaluate the relative information content of the comprehensive income, by Barth et al (1996) to evaluate the value-relevance of banks' fair value disclosures reported under US GAAP, by Cahan et al (2000) to assess the incremental value relevance of the FASB comprehensive income components, by Gjerde et al (2008) to assess the marginal or incremental value-relevance of IFRS earnings and by Hollister et al (2008) to evaluate the incremental information content of accounting accruals in predicting future cash flows. 2 In our paper the -nested‖ model is that including BV it and NI it only , while the -full‖ model is the one including also OCI it.…”