Akbar, Saeed, Shah, Syed Zulfiqar Ali and Stark, Andrew W.. (2011) The value relevance of cash flows, current accruals, and non-current accruals in the UK. International Review of Financial Analysis, Vol.20 (No.5). pp. 311-319. ISSN 10575219

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Abstract

Cash flow statements have a longstanding history as mandated financial statement disclosures, having replaced funds flow statements. The usefulness of such disclosures with respect to one of the main purposes of financial statements—providing information relevant to the assessment of future cash flows and their uncertainty, and the market value of firms—is still subject to debate. This study investigates whether various partitions of earnings involving combinations of a cash flow measure of performance and measures of current accruals and non-current accruals improve the ability to explain market values in the UK relative to using earnings alone. Using a valuation model-based methodology, and employing a UK sample of non-financial firms for the years 1993 to 2007, our results suggest strong support for the assertion that cash flows can have incremental value relevance relative to either earnings or funds flows. By implication, cash flows can have separate value relevance from total and, in particular, current accruals. There is slightly less consistent evidence that current and non-current accruals can have separate value relevance but, nonetheless, the results are still strongly in favour in this respect. Generally, the main source of increase in explanatory power for market values is the separate inclusion of our cash flow measure in the estimated regressions. As a consequence, we conclude that the statement of cash flows in the UK provides information useful to UK investors in valuing firms. Further, requiring a cash flow statement, as opposed to a funds flow statement, improves the information content of financial statements in the UK.

Item Type:	Journal Article
Subjects:	H Social Sciences > HG Finance
Divisions:	Faculty of Social Sciences > Warwick Business School > Accounting Faculty of Social Sciences > Warwick Business School
Journal or Publication Title:	International Review of Financial Analysis
Publisher:	Elsevier BV
ISSN:	10575219
Date:	2011
Volume:	Vol.20
Number:	No.5
Number of Pages:	9
Page Range:	pp. 311-319
Identification Number:	10.1016/j.irfa.2011.06.005
Status:	Peer Reviewed
Publication Status:	Published
Access rights to Published version:	Restricted or Subscription Access
URI:	http://wrap.warwick.ac.uk/id/eprint/44323

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