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Disappearing investment‐cash flow sensitivities: Earnings have not become a worse proxy for cash flow
Author(s) -
Andrén Niclas,
Jankensgård Håkan
Publication year - 2020
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12427
Subject(s) - cash flow , proxy (statistics) , cash on cash return , operating cash flow , earnings , cash and cash equivalents , monetary economics , cash flow forecasting , accrual , cash flow statement , economics , business , accounting , econometrics , mathematics , statistics
Abstract According to a recent conjecture in the literature, earnings have become a poorer proxy for cash flow from operations over time. We find that since 1988, when cash flow statements started to be consistently reported in Compustat, the cash effectiveness of earnings has actually increased for a large sample of US manufacturing firms. This occurs despite the introduction of fair value accounting and increasing accounting accruals during the last three decades. Also contrary to the conjecture, using more comprehensive measures of cash flow does not restore the investment‐cash flow sensitivity, which continues to be around 0.05 in more recent periods.