La moda en los medios

Some alternative statistical procedures have been used in order to test the robustness of the conclusions (untabulated):

• Newey-West standard deviations that control for possible autocorrelation in the data sample have been computed.

• Even though the upper and lower percentiles of all explanatory variables were deleted before the study was conducted, a small number of observations may still be influential on the results. I have run robust regressions on the sample to test for the possible effect of outliers. Robust regression first performs an initial screening based on Cook’s distance > 1 to eliminate gross outliers before calculating starting values and then performs Huber iterations followed by biweight iterations (StataCorp, 2005).

• Panel data techniques that apply generalised least squares have been performed.

All tests show that short term cash flow and earnings predictions are not equivalent to value relevance studies. Cash flow and accruals are significantly associated with current stock return. Current cash flow is consistently related to future cash flow and earnings, while accruals’ significance level remains dependent on whether cash flow or earnings are used as measures of future firm performance.

7 Concluding Remarks

Step 1 of this study investigates the predictive ability of cash flow and accruals for short term firm performance as measured by future cash flow and earnings. The empirical findings suggest that cash flow is consistently related to both future cash flow and future earnings. Accruals appear to be associated with future earnings but not with future cash flow. This can be seen as evidence against the FASB assertion that accruals make current earnings a better cash flow predictor than current cash flow. Step 2 of the study investigates the value relevance of cash flow and accruals. Both variables appear to be highly related to stock return. The results of step 1 and 2 are, however, dependent of the sign of earnings. Consistent with Hayn’s (1995) assertion that negative earnings are less persistent than positive earnings, neither cash flow nor accruals are generally associated with future cash flow and earnings

when earnings are negative. Step 3 of the analysis tries to reconcile the results of step 1 with the findings of step 2. I predict that if accruals and cash flows are related to short term future firm performance as measured by accounting earnings and cash flow, it is reasonable to expect that they are also significantly associated with current stock return. The findings are overall consistent with the prediction. However, the results strongly suggest that the prediction cannot be reversed. Accounting variables do not need to be associated with short term future cash flow or earnings, even if they are value relevant.

Much empirical accounting literature focuses on the predictive ability of accounting measures with respect to future cash flow and/or earnings. While some of the studies explicitly state that such prediction studies are regarded as substitutes for value relevance studies (e.g., Finger, 1994), this assumption is more implicitly observed in other prediction studies (e.g., Barth et al., 2001). As such, the prediction studies can be viewed as indirect value relevance studies. Kim and Kross’ (2005) study is one of few analyses that relates direct value relevance studies to indirect ones. Specifically, they compare the over time development in earnings’ ability as a short term cash flow predictor with the development in earnings’ value relevance. They are surprised to find that earnings have become more related to one-year-ahead cash flows in a time period where earnings’ value relevance has decreased. My study extends the analysis of Kim and Kross (2005). Specifically, I study earnings’ ability to predict the mean of the three next cash flows, as well as one-year ahead earnings and the mean of the three next earnings. My findings are qualitatively identical to Kim and Kross (2005). The conclusion is that results from the cash flow and earnings predictions merely provide indications with respect to accounting variables’ value relevance. There is no one-to-one relationship between cash flow and accruals’ ability as cash flow and earnings predictors and their value relevance.

As such, indirect value relevance studies may be poor proxies for direct investigations of accounting variables’ relation with stock return.

There are several reasons why short term cash flow and earnings prediction tests may differ from value relevance studies. First, while the prediction studies typically analyse very short time horizons, company value is a function of all future cash flows/earnings. For instance, transitory earnings items may introduce noise (compare Kim et al., 2007) in current cash flow and earnings that render them unrelated to future cash flow and earnings even if they are statistically associated with stock return. Second, cash flow or earnings may be defined differently in empirical studies than in equity valuation models. For instance, the traditional cash flow model computes value as a function of free cash flow to equity. Equity value can also be expressed as a function of net financial assets and free cash flow from operations. Nevertheless, most research focuses on cash flow from operations before investments. This research tradition uses another cash flow definition than the models that constitute the theoretical foundation of the empirical studies. Whether a change in cash flow definition towards free cash flow would materially alter the conclusions of prior research is an issue left for future research.

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