The Information Content of Cash Flow Figures
- 1 December 1989
- journal article
- research article
- Published by Taylor & Francis Ltd in Accounting and Business Research
- Vol. 20 (77), 3-11
- https://doi.org/10.1080/00014788.1989.9729389
Abstract
This paper investigates the link between earnings and share prices for a sample of UK companies for the years 1961 to 1977. Three measures of earnings were used: the traditional historical cost accounting return and two which were closer to cash flow measures. The strength of the link between earnings and cumulative abnormal returns was investigated relative to the level of inflation. The results indicate that, while there is substantial information content in the traditional historical cost rate of return, there is very little information conveyed by the measure closest to pure cash flow. No support was therefore found for the use of cash flow based reports. Evidence was found showing substantial changes in the nature of the relationship between accounting and stock returns, but this could not be explained by the effects of inflation.Keywords
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