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The Ability of Earnings to Predict Future Operating Cash Flows Has Been Increasing—Not Decreasing
Author(s) -
KIM MYUNGSUN,
KROSS WILLIAM
Publication year - 2005
Publication title -
journal of accounting research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 6.767
H-Index - 141
eISSN - 1475-679X
pISSN - 0021-8456
DOI - 10.1111/j.1475-679x.2005.00189.x
Subject(s) - extant taxon , cash flow , earnings , operating cash flow , sample (material) , stock (firearms) , cash flow statement , economics , conservatism , econometrics , monetary economics , business , accounting , engineering , mechanical engineering , chemistry , chromatography , evolutionary biology , politics , political science , law , biology
We investigate the relationship between earnings and one‐year‐ahead operating cash flows from 1973 to 2000. Although the extant research indicates a weakening relationship between contemporaneous earnings and stock prices over time, we find that the relationship between current earnings and future operating cash flows has increased over time. This result holds for numerous divisions of our sample. Out‐of‐sample predictions of operating cash flows generally show increasing forecast accuracy over time. Increasing accounting conservatism appears to play a role in this phenomenon.