The value relevance of earnings and cash flows and its cross-sectional determinants : Japanese evidence

Pao Yue-kong Library Electronic Theses Database

The value relevance of earnings and cash flows and its cross-sectional determinants : Japanese evidence

 

Author: Ng, Wing-sum
Title: The value relevance of earnings and cash flows and its cross-sectional determinants : Japanese evidence
Degree: M.Sc.
Year: 1999
Subject: Corporate profits -- Japan
Corporations -- Japan -- Finance
Financial statements -- Japan
Stock exchanges -- Japan
Stocks -- Japan
Rate of return -- Japan
Hong Kong Polytechnic University -- Dissertations
Department: Multi-disciplinary Studies
Dept. of Accountancy
Pages: [5], 95, [71] leaves : ill. ; 30 cm
Language: English
InnoPac Record: http://library.polyu.edu.hk/record=b1473271
URI: http://theses.lib.polyu.edu.hk/handle/200/2121
Abstract: This paper studies the value-relevance of earnings and cash flows by focusing on their relative and incremental information contents of the Japanese market. Besides, we also try to investigate whether and how the level of accruals and corporate ownership structures will affect the ability of earnings and cash flows to measure firm performance. First, consistent with the US evidence of Dechow (1994), stock returns reflect earnings better than net cash flows since earnings contain accruals that mitigate timing and matching problems. Second, the magnitude of response coefficient (帣) for earnings is higher than that of cash flows from operations. Third, the explanatory power (R2) of return-earnings regressions and return-cash flows regressions is lower for Japanese firms than for US firms, reflecting reported earnings and cash flows are less value-relevant in Japan than in the US. This can be explained mainly by the differences in accounting practices and corporate ownership structures between the two countries. Fourth, both earnings and cash flows from operations can have incremental information content. Firth, earnings level is less important in Japan than its change in explaining stock returns. Sixth, together with both level and change variables are better to explain market-adjusted stock returns than only taking level variable alone. In the cross-sectional predictions, we find that (1) as the magnitude of absolute aggregate accruals increases, net cash flows suffer from more timing and matching problems which reduce the ability to reflect firm performance; (2) as the degree of shareholdings by other business increases, no obvious results are observed for the informativeness of earnings and cash flows; (3) as the degree of shareholdings by financial institutions increases, the informativeness of earnings increases; (4) as the informativeness of earnings increases, the shareholdings by foreigners increase.

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