Do Stock Prices Fully Reflect Information in Accruals and Cash Flows about Future Earnings?

CFA Digest ◽  
1997 ◽  
Vol 27 (1) ◽  
pp. 14-16 ◽  
Author(s):  
Frank T. Magiera
Keyword(s):  
Stock Prices ◽  
Cash Flows ◽  
Future Earnings

scholarly journals Kemampuan Laba dan Arus Kas Operasi dalam Memprediksi Laba dan Arus Kas Masa Depan

2018 ◽  
pp. 80
Author(s):  
Frans AP Dromexs Lumbantoruan ◽  
I Gusti Ngurah Agung Suaryana
Keyword(s):  
Cash Flow ◽  
Stock Exchange ◽  
Linear Regression Analysis ◽  
Flow Property ◽  
Multiple Linear Regression Analysis ◽  
Cash Flows ◽  
Future Earnings ◽  
Analysis Technique ◽  
Operating Cash Flow ◽  
Future Cash Flows

This study aims to determine the ability of earnings and operating cash flows in predicting earnings and future cash flows. This research was conducted on property and real estate companies listed on the Indonesia Stock Exchange. The samples used by 20 companies with 40 observations. The sampling was done by nonprobability samplingmethod with purposive samplingtechnique. The analysis technique used is multiple linear regression analysis. Based on the result of the analysis, earnings influences in predicting future earnings. Likewise, earnings and operating cash flow have an effect in predicting future cash flows. However, operating cash flow is not influential in predicting future earnings. Keywords: profitability, cash flow, property

scholarly journals Do Reconciliations Of Segment Earnings Affect Stock Prices?

2012 ◽  
Vol 28 (5) ◽  
pp. 1085 ◽  
Author(s):  
Dana Hollie ◽  
Shaokun Carol Yu
Keyword(s):  
Financial Reporting ◽  
Stock Prices ◽  
Firm Growth ◽  
Abnormal Returns ◽  
Cash Flows ◽  
Management Approach ◽  
Firm Level ◽  
Return On Equity ◽  
The Difference ◽  
Segment Disclosures

While SFAS No. 131 is intended to increase the transparency of financial reporting using a management approach, it may reduce shareholders ability to interpret segment disclosures relative to the industry approach employed under SFAS No.14. This study investigates whether segment reconciliation differences affect stock prices and whether abnormal returns can be earned using information about two components of earnings: aggregated segment earnings and segment earnings reconciliations. We compute reconciliations as the difference between firm-level consolidated earnings and aggregated segment-level earnings. Firms that report negative SERs have greater sales and profitability, greater return on equity, as well as more operating cash flows and firm growth. This suggests that firms that report aggregated segment earnings greater than firm-level consolidated earnings may be better off financially. Our findings show that mispricing does occur when firms report positive SERs by the market, underestimating the segment earnings reconciliation component of earnings persistence. Investors can also earn positive abnormal returns when investors take a long (short) position with the portfolio with the highest (lowest) absolute SERs. On the contrary, we find investors earn negative abnormal returns when firms report negative SERs. Collectively, this study provides evidence that mispricing occurs and that investors over/underestimate the importance and/or persistence of segment earnings reconciliations.

scholarly journals Do corporate bond rating revisions convey information about earnings and dividend changes?

2012 ◽  
Vol 9 (3) ◽  
pp. 373-393 ◽  
Author(s):  
Steven T. Anderson ◽  
Gurmeet Singh Bhabra ◽  
Harjeet S. Bhabra ◽  
Asjeet S. Lamba
Keyword(s):  
Stock Returns ◽  
Cash Flows ◽  
Corporate Bond ◽  
Bond Rating ◽  
Future Earnings ◽  
Rating Agencies ◽  
Abnormal Stock Returns ◽  
Rating Changes ◽  
Future Cash Flows ◽  
Rating Downgrades

We study the information content of corporate bond rating changes regarding future earnings and dividends. Consistent with previous findings, rating downgrades are associated with negative abnormal stock returns, while rating upgrades appear to be nonevents. For downgrades, earnings decline in the two years prior to and the year of the rating change announcement but increase in the year after the rating review. We also find that rating downgrades are followed by a subsequent downward adjustment in dividends. While rating upgrades follow a period of rising earnings, they do not signal any increase in future earnings and no subsequent dividend adjustments are observed. Overall, our results indicate that rating agencies respond more to permanent changes in cash flows and provide little information, if any, about future cash flows.

scholarly journals The ability of cash flows to predict the earning: Evidence from Jordan

2021 ◽  
Vol 18 (4) ◽  
pp. 36-44
Author(s):  
Mohammad Fawzi Shubita
Keyword(s):  
Stock Exchange ◽  
Predictive Ability ◽  
Cash Flows ◽  
Operating Cycle ◽  
Prediction Ability ◽  
Future Earnings ◽  
Industrial Companies ◽  
Amman Stock Exchange ◽  
Great Support ◽  
The Relationship

This study aims to investigate the ability of cash flows components to predict the earning and to know the extent of the relationship between accounting profits and cash flow measures. The study sample consisted of 77 industrial companies listed on the Amman Stock Exchange in Jordan for the period from 2006 to 2019. This study relied on the regression method to test the relationship between the study variables. The study findings showed that the cash flows from operating, investing, and financial activities have a statistically significant impact on predicting future earnings. The study also examined the effect of length of operating cycle and company’s size on the predictive ability of cash flows regarding future earnings. The main results for this aspect are that large companies and short operating cycle companies have higher prediction ability for future earnings than small and long operating cycle companies. This paper provides evidence of the information content of cash flows for future earnings in emerging markets like Jordan and is important for Jordanian shareholders by enabling them to evaluate company’s performance. AcknowledgmentsI would like to thank Amman Arab University for its great support, and for funding this study.

Usefulness of Accounting Estimates

2016 ◽  
Vol 32 (1) ◽  
pp. 123-135 ◽  
Author(s):  
Li Li Eng ◽  
Thanyaluk Vichitsarawong
Keyword(s):  
Cash Flow ◽  
Exploratory Study ◽  
Abnormal Returns ◽  
Cash Flows ◽  
Recent Period ◽  
Future Earnings ◽  
China And India ◽  
Accounting Estimates ◽  
Out Of Sample ◽  
Over Time

This is an exploratory study to examine the quality or usefulness of accounting estimates of companies in China and India over time. Specifically, we examine how well the accounting estimates are able to predict future earnings and cash flows during the period 2003-2013. The results for India indicate that the out-of-sample earnings and cash flow predictions derived are more accurate and more efficient in the more recent period (2010-2013) than the earlier period (2003-2006). In contrast, the out-of-sample earnings and cash flow predictions for China are generally more biased, less accurate, and less efficient. The results indicate abnormal returns earned on hedge portfolios formed on earnings (cash flow) predictions for India in the recent period. In contrast, none of the portfolios for China earn positive returns. The results suggest that the accounting estimates in India in recent years have become better predictors of future earnings and cash flow than accounting estimates in the earlier period. However, the accounting estimates in China are not relevant for predicting earnings and cash flows over the years in the sample period.

Dividend Changes as Predictors of Future Profitability

2021 ◽  
Vol 15 (1) ◽  
Author(s):  
Fakhrul Hasan
Keyword(s):  
Information Content ◽  
Stock Prices ◽  
Special Interest ◽  
Dividend Policy ◽  
Future Earnings ◽  
New Information ◽  
Dividend Increases ◽  
Using Data ◽  
The Uk ◽  
Dividend Tax

This study investigates “the information content of dividends hypothesis” using data on UK firms from 1990-2015. Dividends act as an important conveyor of information. Dividend changes may trigger changes in stock prices because they may convey new information about the firm’s future earnings and profitability. Why do companies pay dividends (or analogously why are stockholders interested in receiving dividends), given that it is well known that dividends are often taxed heavily? This question is of special interest in the UK, where the dividend tax is higher than the capital gain tax. Previous research has used a number of dividend policy theories to explain the dividend policy puzzle. We carry out several estimations and find out that contrary to some other studies, there is no evidence that dividend increases (decreases) provide information about the future profitability or earnings of UK firms.

Instructional Case: General Host: Accounting for a Bond Refunding

1999 ◽  
Vol 14 (3) ◽  
pp. 451-464 ◽  
Author(s):  
Mary Beth Mohrman
Keyword(s):  
Earnings Management ◽  
Stock Prices ◽  
Cash Flows ◽  
Economic Consequences ◽  
Financial Accounting ◽  
Business Press ◽  
Paper Money ◽  
Book Values ◽  
The Relationship ◽  
Interest Expense

This assignment, which involves accounting for a simple bond refunding, achieves several objectives. First, it reinforces basic concepts in bond accounting, such as cash flows, book values, interest expense and gains/losses from early extinguishment. Second, it leads students to critically analyze an article from the popular business press. Third, it illustrates many important issues in financial accounting, such as earnings management, the relationship between earnings and stock prices, and economic consequences. Students are asked to read “Paper Money” from Forbes' “Numbers Game” column. The article describes General Host's bond exchange offer and questions the recognition of a gain in such circumstances. The case assignment requires students to carefully analyze the bond exchange and to question many of the authors' assumptions about the economic impacts of the exchange offer. I have used this case successfully in undergraduate intermediate accounting classes and in an introductory financial accounting course for M.B.A. students.

scholarly journals Pricing Chinese Convertible Bonds with Default Intensity by Monte Carlo Method

2019 ◽  
Vol 2019 ◽  
pp. 1-8
Author(s):  
Xin Luo ◽  
Jinlin Zhang
Keyword(s):  
Monte Carlo ◽  
Stock Prices ◽  
Default Risk ◽  
Emerging Market ◽  
Cash Flows ◽  
Convertible Bonds ◽  
Martingale Measure ◽  
Default Intensity ◽  
Long Run ◽  
Two Parameters

This article proposes a new way to price Chinese convertible bonds by the Longstaff-Schwartz Least Squares Monte Carlo simulation. The default intensity and the volatility are the two important parameters, which are difficultly obtained in the emerging market, in pricing convertible bonds. By developing the Merton theory, we find a new effective method to get the theoretical value of the two parameters. In the pricing method, the default risk is described by the default intensity, and a default on a bond is triggered by the bottom Q(T) (default probability) percentile of the simulated stock prices at the maturity date. In the present simulation, a risk-free interest rate is used to discount the cash flows. So, the new pricing model is considered to tally with the general pricing rule under martingale measure. The empirical results of the CEB and the XIG convertible bonds by the proposed method are compared with those obtained by the credit spreads method. It is also found that the theoretical prices calculated by the method proposed in the article fit the market prices well, especially, in the long run tendency.

Short Sellers and the Informativeness of Stock Prices with Respect to Future Earnings

2012 ◽  
Author(s):  
Michael S. Drake ◽  
James N. Myers ◽  
Linda A. Myers ◽  
Michael D. Stuart
Keyword(s):  
Stock Prices ◽  
Future Earnings ◽  
Short Sellers
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