An Empirical Investigation of the Information Content of Cash Flow and Cash Flow per Share
This study investigates the information content of cash flow and earnings measures. The investigation is based on the association between cash flow measures and earnings measures with Cumulative Abnormal Returns (CAR). The intention is to evaluate the usefulness of cash flow data as required by FRS...
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| Format: | Dissertation |
| Language: | English |
| Published: |
ProQuest Dissertations & Theses
01-01-1995
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| Online Access: | Get full text |
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| Summary: | This study investigates the information content of cash flow and earnings measures. The investigation is based on the association between cash flow measures and earnings measures with Cumulative Abnormal Returns (CAR). The intention is to evaluate the usefulness of cash flow data as required by FRS 1 and introduce cash flow per share as a possible development that may contain information value for security markets. This study is an attempt to answer the following questions: 1 Are accruals accounting earnings and cash flow measures highly correlated? 2. Do cash flow components disaggregated further than the 5 sub headings required under FRS.l have incremental information content? 3. Does cash flow per share have any information content beyond total cash flow variables? 4. Do cash flow and cash flow per share have a significant information content beyond earnings and earnings per share? Previous research by Bowen, Burgstahler and Daley (1987), Rayburn (1986) , Livnat and Zarowin (1990) and Ali and Pope (1994) provide evidence about the positive association between unexpected cash flow and abnormal returns. On the other hand, Board, Day and Walker (1989) and Board, Day and Napier (1993) cannot find any information content for cash flow measures. The inconclusive and contradictory results of these previous studies indicate that further research is needed. In addition the specific requirements of FRS have not been perviously tested. The sample for this study consists of 156 industrial firms quoted on the London Stock Exchange which were in existence for the fifteen-year period 1977 to 1991 inclusive. The primary data sources are DATA STREAM database and LONDON SHARE PRICE DATABASE. Five multiple regression models are used in this investigation. The current study findings indicate that some greater disaggregation of cash flows than that required under FRS.l does have additional information content. Additionally, it is found that the disaggregation required under FRS 1 is not optimal from an information standpoint. The results suggest similarity in the information content in both cash flow and cash flow per share, and there is no evidence that either one has incremental information value beyond the other. Cash flow variables do not exhibit any incremental information content beyond earnings, and in addition, cash flow per share variables do not indicate any incremental explanatory value over EPS. However, earnings and EPS do contain incremental explanatory value beyond cash flow and cash flow per share variables. Also, earnings has incremental explanatory value over EPS. Furthermore, incorporation of change and level variables with the varying parameter model reveals the highest explanatory power. To investigate the important of firm size on the market reaction to the release of cash flow information the sample is divided into three sub samples small, medium and large firms based on sales value. The results suggest that firm size is an important factor in determining the explanatory power of the models. We find that models for small and medium firms have more explanatory power than models for large firms. |
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| ISBN: | 9780438607583 0438607589 |