Open Access
Corporate Liquidity And The Significance Of Earnings Versus Cash Flow: An Examination Of Industry Effects
Author(s) -
Carol Lancaster,
Jerry L. Stevens
Publication year - 2011
Publication title -
journal of applied business research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.149
H-Index - 22
eISSN - 2157-8834
pISSN - 0892-7626
DOI - 10.19030/jabr.v15i3.5669
Subject(s) - explanatory power , accrual , market liquidity , cash flow , economics , earnings , working capital , econometrics , operating cash flow , cash flow forecasting , monetary economics , business , accounting , philosophy , epistemology
Prior studies in this journal tested relationships between measures of cash flow, accrual income, and both static and dynamic liquidity. The analysis is extended in this paper to test for industry effects where the relationships are not constant across industry groupings, making it difficult to generalize the findings from a larger sample of firms. The finding in other studies that accrual income has no incremental explanatory power for changes in the cash conversion cycle measure of liquidity can be generalized across industry groupings. But, prior studies find that working capital from operations and cash flow from operations have incremental explanatory power for liquidity measures while we show that this relationship is industry-specific and cannot be generalized across all firms. Also, we find that the incremental explanatory power of accrual income for changes in measures of static liquidity, such as current and quick ratios, is found almost exclusively in the manufacturing industry. Industry effects found in this study suggest the need for more caution in generalizing relationships between accrual income, cash flow, and liquidity measures.