What do accruals tell us about future cash flows?

Mary E. Barth (), Greg Clinch and Doron Israeli
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Mary E. Barth: Stanford University
Greg Clinch: University of Melbourne
Doron Israeli: Arison School of Business, Interdisciplinary Center (IDC) Herzliya

Review of Accounting Studies, 2016, vol. 21, issue 3, No 3, 768-807

Abstract: 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.

Keywords: Accruals; Cash flows; Equity valuation; Cash flow forecasting; Valuation model; C13; C51; E37; G17; M41 (search for similar items in EconPapers)
Date: 2016
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Citations: View citations in EconPapers (17)

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DOI: 10.1007/s11142-016-9360-4

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