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The use of earnings and cash flows in investment decisions in the U.S. and Mexico: Experimental evidence

Jose E. Miranda-Lopez and Linda M. Nichols

Journal of International Accounting, Auditing and Taxation, 2012, vol. 21, issue 2, 198-208

Abstract: In this study, we investigate which of two accounting performance measures, earnings or cash flows, is used more in valuation decisions by non-professional investors in the United States and in Mexico. This issue is relevant for the Mexican Stock Market (Bolsa Mexicana de Valores) because the Bolsa's growth has stagnated compared with markets of other Latin American countries. Results of the study reveal that the majority of participants in the U.S. rely on earnings while the majority of participants in Mexico rely on cash flows. Results also suggest that the users’ predisposition can be dysfunctional to the extent that they do not consider using the other accounting measure, even when doing so made it easier to arrive at the correct valuation result (i.e. they did not choose to use the more persistent and therefore easier to forecast accounting measure). However, results are mixed for participants using earnings, since we document a higher chance of forecasting errors for participants in both countries when using earnings rather than cash flows in their calculations for the failure of these participants to adjust earnings for depreciation.

Keywords: Non-professional investors; Earnings; Cash flows; Forecast errors; Cross-country comparisons (search for similar items in EconPapers)
Date: 2012
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jiaata:v:21:y:2012:i:2:p:198-208

DOI: 10.1016/j.intaccaudtax.2012.07.008

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