The Association between Various Earnings and Cash Flow Measures of Firm Performance and Stock Returns: Some Australian Evidence

30 Pages Posted: 4 Oct 2005

See all articles by Jodi Watson

Jodi Watson

University of Technology Sydney (UTS) - School of Accounting

Peter Alfred Wells

University of Technology Sydney, Accounting Discipline Group ; Financial Research Network (FIRN)

Date Written: September 24, 2005

Abstract

This paper examines the association of various earnings and cash flow based measures of firm performance with stock returns to determine the measure(s) that best capture contemporaneous firm performance. For profit making firms, earnings based performance measures are found to be more closely associated with stock returns than cash flow based measures. This is consistent with accrual accounting enhancing the financial reporting process and providing managers with an efficient mechanism through which their superior information can be signalled to financial statement users, as suggested by Dechow (1994). Similarly for firms with relatively high income increasing accruals, earnings based measures better capture firm performance than cash flow based measures. However, for loss making firms and firms with relatively high levels of income decreasing accruals, neither earnings nor cash flow based measures capture firm performance well.

Keywords: Accounting performance measures, earnings, accruals, cash flows

JEL Classification: G12, M41

Suggested Citation

Watson, Jodi and Wells, Peter Alfred, The Association between Various Earnings and Cash Flow Measures of Firm Performance and Stock Returns: Some Australian Evidence (September 24, 2005). Available at SSRN: https://ssrn.com/abstract=815365 or http://dx.doi.org/10.2139/ssrn.815365

Jodi Watson (Contact Author)

University of Technology Sydney (UTS) - School of Accounting ( email )

P.O. Box 123
Broadway NSW 2007
Australia

Peter Alfred Wells

University of Technology Sydney, Accounting Discipline Group ( email )

P.O. Box 123
Broadway NSW 2007
Australia
+61 (02) 9514 3628 / 3629 (Phone)
+61 (02) 9514 5515 (Fax)

Financial Research Network (FIRN)

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St Lucia, 4071 Brisbane
Queensland
Australia

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