Advanced

Disappearing investment‐cash flow sensitivities: earnings have not become a worse proxy for cash flow

Andrén, Niclas LU and Jankensgård, Håkan LU (2020) In Journal of Business Finance & Accounting 47(5-6). p.760-785
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 U.S. 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.
Please use this url to cite or link to this publication:
author
and
organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Investment, financial constraints, investment-cash flow sensitivity, cash effectiveness, cash flow, earnings, accruals, G30, G32, M41
in
Journal of Business Finance & Accounting
volume
47
issue
5-6
pages
26 pages
publisher
Wiley-Blackwell
external identifiers
  • scopus:85078653701
ISSN
1468-5957
DOI
10.1111/jbfa.12427
language
English
LU publication?
yes
id
927b1ba9-e712-48d5-b798-d934d43da408
date added to LUP
2020-01-24 08:15:21
date last changed
2020-10-29 10:50:45
@article{927b1ba9-e712-48d5-b798-d934d43da408,
  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 U.S. 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},
  issn         = {1468-5957},
  language     = {eng},
  month        = {01},
  number       = {5-6},
  pages        = {760--785},
  publisher    = {Wiley-Blackwell},
  series       = {Journal of Business Finance & Accounting},
  title        = {Disappearing investment‐cash flow sensitivities: earnings have not become a worse proxy for cash flow},
  url          = {http://dx.doi.org/10.1111/jbfa.12427},
  doi          = {10.1111/jbfa.12427},
  volume       = {47},
  year         = {2020},
}