Department
School of Accountancy
Document Type
Article
Publication Date
9-11-2007
Abstract
In this paper we examine the validity of using one-year-ahead cash flows prediction tests as a substitute for the value relevance test of earnings. We show theoretically that the R2 of the cash flows prediction regression is contaminated by the presence of (1) noise in the cash flows and (2) spurious, i.e., value-unrelated, correlation between one-year-ahead cash flows and current earnings. We test if either of the above two factors contribute to the result of Kim and Kross (2005) that the ability of earnings to predict one-year-ahead cash flows has increased over the recent decades, in contrast to the evidence of decreasing value relevance of earnings. We find empirical evidence that both factors contributed to their result and conclude that the cash flows prediction test is a poor substitute for the value relevance test of earnings.
Journal Title
Business: Theory and Practice
Journal ISSN
1678-0627
Volume
17
Issue
4
First Page
353
Last Page
360