THE INCREMENTAL INFORMATION CONTENT OF ACCRUAL ACCOUNTING EARNINGS (CASH FLOW, ASSOCIATION STUDY, ACCRUAL ADJUSTMENTS, WORKING CAPITAL, DEPRECIATION).

摘要

Earnings are a transformation of cash flow by a process of accrual accounting adjustments. Both cash flows and accrual adjustments potentially convey information that is consistent with the information used by investors to value equity securities. Previous empirical research has documented a positive association between unexpected earnings and abnormal returns.Residuals of the forecasted monthly market model, cumulated over the fiscal year, serve as the dependent variable in this study. The independent variables are unexpected cash flow and unexpected accrual adjustments. In a pooled regression the coefficient of unexpected accrual adjustments (cash flows) is negative (positive) and significant as hypothesized. In yearly cross-sectional regressions, the coefficient of unexpected accrual adjustments (cash flows) is negative (positive) and significant in 13 (15) out of 20 years.When components are substituted for aggregate accrual adjustments in the regressions, the coefficients of unexpected changes in working capital and depreciation are positive and significant. Unexpected changes in deferred taxes are insignificant in all regressions.The major conclusion drawn from this study is that aggregate accrual adjustments are consistent with the information set used by market participants to value equity securities. This is a necessary condition for asserting that the information provided by the accrual accounting process is useful to investors in valuing equity securities.In this dissertation an association study methodology is used to empirically test whether accrual adjustments have an association with abnormal returns that is incremental to any cash flow association with abnormal returns. Cash flow is defined as earnings before extraordinary items less net accrual adjustments. Accrual adjustments include depreciation, the exchange in deferred taxes, and the net change in working capital. Surrogates for unexpected values of the variables are chosen from firm-specific univariate time series and index models estimated for each variable.In addition, various components of accrual adjustments provide different signals to investors concerning the future cash flows of the firm. The change in working capital may aid in distinguishing short run fluctuations in cash flow that do not possess long run pricing implications. Depreciation is most likely a surrogate for the investment activity of the firm.