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Do Capital Markets Value Earnings And Cash Flows Alike? International Empirical Evidence

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  • Melita CHARITOU
  • Petros LOIS
  • Adamos VLITTIS

Abstract

In this study we examine empirically the value relevance of earnings and cash flows in three major capital markets, two Anglo–Saxon, the UK and the USA and one code law country, France. Our dataset consists of more than 41,000 USA, UK and French firm–year observations over a nine year period. Multivariate statistical regression analysis is undertaken to test the major research hypotheses. Results show that the value relevance of earnings and cash flows is country specific. Specifically, results indicate that earnings are valued more in France and less in the Anglo–Saxon countries, due to the fact that the financial reporting in the Anglo– Saxon countries is less conservative and managers may manipulate easier financial information. Moreover, as hypothesized, results show that cash flows are the most (least) value relevant in the USA and the UK (France). In summary, results support that there are substantial differences in the way investors and financial analysts perceive earnings and cash flows in the UK, France and the USA. The results of this study should be of great importance to the major stakeholders such as investors, creditors, financial analysts, especially after the recent global financial crisis and the latest collapses of colossal organizations worldwide.

Suggested Citation

  • Melita CHARITOU & Petros LOIS & Adamos VLITTIS, 2010. "Do Capital Markets Value Earnings And Cash Flows Alike? International Empirical Evidence," Journal of Applied Economic Sciences, Spiru Haret University, Faculty of Financial Management and Accounting Craiova, vol. 5(3(13)/Fal), pages 173-183.
  • Handle: RePEc:ush:jaessh:v:5:y:2010:i:3(13)_fall2010:p:108
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    References listed on IDEAS

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    1. Tuomo Vuolteenaho, 2002. "What Drives Firm-Level Stock Returns?," Journal of Finance, American Finance Association, vol. 57(1), pages 233-264, February.
    2. Rajiv D. Banker & Rong Huang & Ramachandran Natarajan, 2009. "Incentive Contracting and Value Relevance of Earnings and Cash Flows," Journal of Accounting Research, Wiley Blackwell, vol. 47(3), pages 647-678, June.
    3. Konan Chan & Louis K. C. Chan & Narasimhan Jegadeesh & Josef Lakonishok, 2006. "Earnings Quality and Stock Returns," The Journal of Business, University of Chicago Press, vol. 79(3), pages 1041-1082, May.
    4. Neil Garrod, 1998. "Investor Response to Cash Flow Information," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 25(5&6), pages 613-630.
    5. repec:bla:joares:v:29:y:1991:i:1:p:19-36 is not listed on IDEAS
    6. Dechow, Patricia M., 1994. "Accounting earnings and cash flows as measures of firm performance : The role of accounting accruals," Journal of Accounting and Economics, Elsevier, vol. 18(1), pages 3-42, July.
    7. Ball, Ray & Robin, Ashok & Wu, Joanna Shuang, 2003. "Incentives versus standards: properties of accounting income in four East Asian countries," Journal of Accounting and Economics, Elsevier, vol. 36(1-3), pages 235-270, December.
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    1. repec:eee:quaeco:v:66:y:2017:i:c:p:182-191 is not listed on IDEAS

    More about this item

    Keywords

    capital markets; earnings; cash flows; France; empirical;

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General

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