The Value-Relevance of Cash Flows and Accruals

Download or read book The Value-Relevance of Cash Flows and Accruals written by Krishna R. Kumar and published by . This book was released on 2008 with total page 60 pages. Available in PDF, EPUB and Kindle. Book excerpt: We examine the role of investment opportunities as a determinant of the relative importance of cash flows from operations (CFO) and accruals in firm valuation. We find that at low investment-opportunity levels, CFO value-relevance increases with investment opportunities. When investment opportunities are high, accrual value-relevance declines as investment opportunities increase. Consequently, earnings value-relevance first varies directly and then inversely with investment opportunities. We show that the increase in CFO value-relevance is consistent with cost differentials between internal and external financing causing CFO to be an increasingly important determinant of the realization of investment opportunities. The decline in accrual value-relevance at high investment-opportunity levels appears to be attributable to accounting measurement deficiencies.