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The role of accounting accruals for the prediction of future cash flows: evidence from Spain

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  • Laura Arnedo
  • Fermín Lizarraga
  • Santiago Sánchez

Abstract

The aim of this study is to determine whether accruals have information value beyond that provided by isolated current cash flows for the prediction of future cash flows. Using a sample of 4,397 Spanish companies (mostly privately held), we estimate in-sample regressions of future cash flows on isolated current cash flows and on accrual-based earnings. We then find that the out-of-sample prediction errors provided by the accrual-based earnings model are significantly lower than those obtained with the cash flows model. We also regress the decrease in prediction errors brought about by the addition of accruals on a set of firm-specific circumstances where accounting manipulation is expected. In all cases the decrease in prediction errors is significantly affected in the hypothesized direction. Copyright The Author(s) 2012

Suggested Citation

  • Laura Arnedo & Fermín Lizarraga & Santiago Sánchez, 2012. "The role of accounting accruals for the prediction of future cash flows: evidence from Spain," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 3(4), pages 499-520, December.
    • Handle: RePEc:spr:series:v:3:y:2012:i:4:p:499-520
    DOI: 10.1007/s13209-011-0070-7
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    Cited by:

    1. Pedro J. García-Teruel & Pedro Martínez-Solano & Juan P. Sánchez-Ballesta, 2014. "Supplier Financing and Earnings Quality," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 41(9-10), pages 1193-1211, November.
    2. Juan L. Gandía & David Huguet, 2021. "Combined Effects of Auditing and Discretionary Accruals on the Cost of Debt: Evidence From Spanish SMEs," SAGE Open, , vol. 11(4), pages 21582440211, October.
    3. Jaehong Lee & Eunsoo Kim, 2019. "Foreign Monitoring and Predictability of Future Cash Flow," Sustainability, MDPI, vol. 11(18), pages 1-22, September.
    4. Jaehong Lee & Suyon Kim, 2020. "Does Human Resource Investment for Internal Control System Enhance Future Cash Flow Predictability?," Sustainability, MDPI, vol. 12(20), pages 1-16, October.

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    More about this item

    Keywords

    Cash flows; Accruals; Prediction; M41;
    All these keywords.

    JEL classification:

    • M41 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Accounting

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