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What do accruals tell us about future cash flows?

Author

Listed:
  • Mary E. Barth

    (Stanford University)

  • Greg Clinch

    (University of Melbourne)

  • Doron Israeli

    (Arison School of Business, Interdisciplinary Center (IDC) Herzliya)

Abstract

Our model, which is adapted from Feltham and Ohlson (Contemp Account Res 11:689–731, 1995) and Ohlson (Contemp Account Res 11:661–687, 1995) and extends Dechow and Dichev (Account Rev 77:35–59, 2002), characterizes the information about future cash flows reflected in accruals. It reveals 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 aligns future or past cash flows and current period economics and whether it relates to the current or prior period. Thus each type of accrual has a different coefficient in valuation and forecasting cash flows or 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 our main insight, namely that partitioning accruals based on their role in cash-flow alignment increases their ability to forecast future cash flows and earnings and explain firm value.

Suggested Citation

  • Mary E. Barth & Greg Clinch & Doron Israeli, 2016. "What do accruals tell us about future cash flows?," Review of Accounting Studies, Springer, vol. 21(3), pages 768-807, September.
    • Handle: RePEc:spr:reaccs:v:21:y:2016:i:3:d:10.1007_s11142-016-9360-4
    DOI: 10.1007/s11142-016-9360-4
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    References listed on IDEAS

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    Cited by:

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    2. Nallareddy, Suresh & Sethuraman, Mani & Venkatachalam, Mohan, 2020. "Changes in accrual properties and operating environment: Implications for cash flow predictability," Journal of Accounting and Economics, Elsevier, vol. 69(2).
    3. S. P. Kothari & Charles Wasley, 2019. "Commemorating the 50‐Year Anniversary of Ball and Brown (1968): The Evolution of Capital Market Research over the Past 50 Years," Journal of Accounting Research, Wiley Blackwell, vol. 57(5), pages 1117-1159, December.
    4. Elio Alfonso & Dana Hollie & Shaokun Carol Yu, 2019. "Cash Flow Restatements: Stock Market Reaction to Overstated versus Understated Restatements," Accounting and Finance Research, Sciedu Press, vol. 8(3), pages 1-1, August.
    5. Emmanuel Mamatzakis & Anna Bagntasarian, 2021. "The nexus between CEO incentives and analysts' earnings forecasts," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 6205-6248, October.
    6. Pooja Kumari & Chandra Sekhar Mishra, 2020. "Equity Values and Prediction of Earnings with Disaggregation of Earnings in India," Global Business Review, International Management Institute, vol. 21(4), pages 990-1010, August.
    7. Nezlobin, Alexander & Sloan, Richard G. & Giedt, Jenny Zha, 2022. "Construct validity in accruals quality research," LSE Research Online Documents on Economics 112165, London School of Economics and Political Science, LSE Library.
    8. De Andrés Fazio, Salvador & Urquía Grande, Elena & Pérez Estébanez, Raquel, 2022. "The “secret life” of the Statement of Cash Flow: A bibliometric analysis," Cuadernos de Gestión, Universidad del País Vasco - Instituto de Economía Aplicada a la Empresa (IEAE).
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    10. Doron Israeli & Ron Kaniel & Suhas A. Sridharan, 2022. "The Real Side of the High-Volume Return Premium," Management Science, INFORMS, vol. 68(2), pages 1426-1449, February.
    11. Philip Beaulieu & Louise Hayes & Lev M. Timoshenko, 2023. "Changes in accounting estimates: An update of priors or an earnings management strategy of “last resort”?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 50(3-4), pages 622-659, March.
    12. Shafi Mohamad & Ooi Chee Keong & Syed Ehsanullah, 2019. "Accounting standards and the value relevance of financial statements," Asian Journal of Empirical Research, Asian Economic and Social Society, vol. 9(11), pages 337-345, November.
    13. KapSoon Kim & SungMan Yoon, 2017. "Taxpayer’s Perception to Tax Payment in Kind System in Support of SMEs’ Sustainability: Case of the South Korean Government’s Valuation of Unlisted Stocks," Sustainability, MDPI, vol. 9(9), pages 1-12, August.
    14. Sandip Dhole & Ferdinand A. Gul & Sagarika Mishra & Ananda M. Pal, 2021. "The joint information role of analysts’ cash flow and earnings forecasts," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(1), pages 499-541, March.
    15. Chad R. Larson & Richard Sloan & Jenny Zha Giedt, 2018. "Defining, measuring, and modeling accruals: a guide for researchers," Review of Accounting Studies, Springer, vol. 23(3), pages 827-871, September.

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