An empirical investigation of ‘closeness to cash’ as a determinant of earnings response coefficients

Gnanakumar Visvanathan

Accounting and Business Research, 2006, vol. 36, issue 2, 109-120

Abstract: ‘Closeness-to-cash,’ specified in terms of the extent that earnings approximate operating cashflows, is frequently advanced as a desirable property of earnings. We consider whether the security price response to unexpected earnings, as indicated by the earnings response coefficient (ERC), depends on the extent that earnings are historically close to operating cashflows. Using a sample of 1993-1999 quarterly earnings announcements, we find that the ERC varies inversely with the relative (size-adjusted) absolute magnitude of the accrual component of quarterly earnings after controlling for other well-documented determinants of ERC. Such results support the closeness-to-cash property of a firm's earnings time series as an important ERC determinant.

Date: 2006
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DOI: 10.1080/00014788.2006.9730013

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