An International Meeting of the American Accounting Association American Accounting Association 2006 Annual Meeting August 6–9, 2006 Washington, D.C.

Steven F Orpurt
Singapore Management University

Yoonseok Zang
Singapore Management University

Abstract: We hypothesize and find that producing a direct cash flow statement improves the association between current returns and future earnings (and between current returns and future earnings components: future operating cash flows and future accruals). Our results demonstrate that firms producing direct cash flow statements reflect more future earnings information, including the components of future earnings, in their current stock returns. We find no evidence that firms producing a direct cash flow statement enhance the association between contemporaneous earnings and returns. These findings are robust to a number of sensitivity checks. Our findings support a recent recommendation from the CFA Institute that firms produce direct cash flow statements (to help investors predict future performance). These findings also support the continued regulatory interest in direct cash flow statements by the FASB and IASB.

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