Predictive ability of operating cash flow and earnings on future cash flow of NSE-listed firms

Mwila J. Mulenga and Meena Bhatia

Afro-Asian Journal of Finance and Accounting, 2023, vol. 13, issue 6, 693-713

Abstract: The study examines the predictive ability of current operating cash flow and earnings on the future operating cash flow of the National Stock Exchange-100 listed firms in India. It is a 15 years (2001 to 2015) study and has 1,120 firm-year observations. The ordinary least squares method is used to improve the accuracy fixed effect model and a Random effect model are used. Evidence suggests that the current operating cash flows explain future cash flow better than current earnings, which contrasts with the Financial Accounting Standards Board assertion (FASB, Statement of Financial Accounting Concepts No. 1, 1978) and International Accounting Standards Board (IASB, 1989). Current operating cash flow's predictive ability on future cash flow is more powerful in profit-making firms than the loss-making firms and for all industries. Further, the disaggregated earnings model significantly enhances predictive ability. These findings will enable the users of financial statements to understand the role of current operating cash flow and earnings in predicting future operating cash flows.

Keywords: operating cash flow; earnings; predictive ability; accruals; loss-making firms; profit-making firms; disaggregated earnings; India. (search for similar items in EconPapers)
Date: 2023
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