Disappearing investment‐cash flow sensitivities: earnings have not become a worse proxy for cash flow

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Abstract

According to a recent conjecture in the literature, earnings have become a poorer proxy for cash flow from operations over time. We find that since 1988, when cash flow statements started to be consistently reported in Compustat, the cash effectiveness of earnings has actually increased for a large sample of U.S. manufacturing firms. This occurs despite the introduction of fair value accounting and increasing accounting accruals during the last three decades. Also contrary to the conjecture, using more comprehensive measures of cash flow does not restore the investment‐cash flow sensitivity, which continues to be around 0.05 in more recent periods.

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Subject classification (UKÄ) – MANDATORY

  • Business Administration

Keywords

  • Investment, financial constraints, investment-cash flow sensitivity, cash effectiveness, cash flow, earnings, accruals, G30, G32, M41
Original languageEnglish
JournalJournal of Business Finance & Accounting
Publication statusE-pub ahead of print - 2020 Jan 14
Publication categoryResearch
Peer-reviewedYes