The role of accounting accruals for the prediction of future cash flows: evidence from Spain

Abstract

The aim of this study is to determine whether accruals have information value beyond that provided by isolated current cash flows for the prediction of future cash flows. Using a sample of 4,397 Spanish companies (mostly privately held), we estimate in-sample regressions of future cash flows on isolated current cash flows and on accrual-based earnings. We then find that the out-of-sample prediction errors provided by the accrual-based earnings model are significantly lower than those obtained with the cash flows model. We also regress the decrease in prediction errors brought about by the addition of accruals on a set of firm-specific circumstances where accounting manipulation is expected. In all cases the decrease in prediction errors is significantly affected in the hypothesized direction.

The Relative Ability of Earnings and Cash Flow from Operations in Predicting Future Cash Flows: Evidence from India

“…5, No. 2 (2009, Ahmadi, A., and Ahmadi, V. (2012), Wa ldron and Jordan (2010) and Arnedo et al (2012), Finger (1994); Farshadfar et al (2008); Lev et al (2010); Chotkunakitti (2005) and Al-Debi"e (2011).…”

“…From the review of literature, most of the previous work focused on measuring ability of earnings, cash flow from operations and accruals in forecasting future cash flow were coming from the developed countries, example the study of Bowen et al (1986); Finger (1994); Farshadfar et al (2008); Al-Attar and Hussain (2004); Penham and Yehuda (2009); Lev et al(2010); Waldron and Jordan (2010) and Arnedo et al (2012) and only few studies were coming from developing countries, example the study of Chotkunakitti (2005), Efayena,O. (2015), Supriyadi (1998), Telmoudi and Noubbigh (2010) and Al-Debi"e (2011).…”

Supplier Financing and Earnings Quality

“…The implication of these findings is that financial reporting quality has a more limited role in countries like Spain than in those with higher enforcement and more developed capital markets, but the use of aggressive earnings management to “jump” zero and report positive earnings is also an indicator of the incentives of managers to access the financing provided by banks and suppliers. In this sense, some studies have found that financial reporting quality in Spain “matters”, because it has economic implications in the debt market for obtaining lower debt costs (Gill‐de‐Albornoz and Illueca, ) and longer debt maturity in large firms (García‐Teruel et al., ), and because accruals have information content to predict future cash flows (Arnedo, Lizarraga and Sánchez, ).…”

Foreign Monitoring and Predictability of Future Cash Flow

“…Later, Garrod and Hadi [8] and Al-Attar and Hussain [9] conducted similar studies using data from companies based in the United Kingdom. More recently, studies have been conducted using data from a number of other countries, such as Australia [10], Tunisia [11], Spain [12], India [13] and Nigeria [14]. Still, in regard to the effectiveness with which various aspects of financial reporting can be used to predict future cash flow, there has been little research done using data from companies based in emerging markets such as South Korea.…”