The Information Content Of Cash Flow Measures PDF Download

Previous studies cross-sectionally pooled heterogeneous firms to examine the information content of earnings and cash flow measures. This study extends prior research; and is the first to examine the corporate life-cycle effects on the informativeness of earnings (NI), operating cash flows (CFO), financing cash flows (CFF), and investing cash flows (CFI). The life-cycle concept is an appealing economic context which allows for a relatively more homogenous study of these information content relationships. It is a concept used frequently in academic research and the financial press, because it captures a set of financial characteristics and strategies for firms in a particular life-cycle stage. This study examines both the informativeness of earnings and cash flow measures in each of four life-cycle stages: Start- up, Growth, Mature, and Decline. Hypotheses are developed predicting that earnings and operating cash flows contain incremental information content in life-cycle stages when a firm's assets in place are a major component of firm value. Financing cash flows and investing cash flows are expected to be incrementally informative during stages characterized by growth or uncertainty. The results are consistent with the hypothesis that neither NI, nor CFO are incrementally informative in the start-up stage, characterized by few assets in place. When there are relatively more assets in place in the growth, mature, and decline stages; however, the results support the hypothesis that NI and CFO contain incremental information. Hypotheses regarding CFF and CFI are generally supported. Results support the incremental informativeness of CFF in the growth, mature, and decline stages; but not in the start-up stage. CFI is informative in all life-cycle stages. These results provide support for the usefulness of the cash flow statement required by FAS 95.