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Disappearing Investment-Cash Flow Sensitivities: Earnings Have Not Become a Worse Proxy for Cash Flow

Andrén, Niclas LU and Jankensgård, Håkan LU (2017) Financial Management Association Annual Meeting 2018
Abstract (Swedish)
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.
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.
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author
organization
publishing date
type
Contribution to conference
publication status
published
subject
conference name
Financial Management Association Annual Meeting 2018
conference location
San Diego
conference dates
2018-10-10 - 2018-10-13
language
English
LU publication?
yes
id
776324e0-9bbc-4f17-a30e-6f38f0c588de
alternative location
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2887729
date added to LUP
2018-10-24 11:45:47
date last changed
2018-11-26 11:10:01
@misc{776324e0-9bbc-4f17-a30e-6f38f0c588de,
  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. },
  author       = {Andrén, Niclas and Jankensgård, Håkan},
  language     = {eng},
  location     = {San Diego},
  title        = {Disappearing Investment-Cash Flow Sensitivities: Earnings Have Not Become a Worse Proxy for Cash Flow},
  year         = {2017},
}