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An International Meeting of American Accounting
Association
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Additional Value Relevance and Supplemental Role of Cash Flow Components – An Extension |
C.S. Agnes Cheng
University of Houston
Zishang Cathy Liu
University of Houston
Wayne Thomas
University of Oklahoma
Abstract: This paper investigates the additional value relevance (beyond accruals) and supplemental role of investing cash flows, free cash flows (FCF) and its components in a return-earnings framework. Viewing investing cash flows and FCF as two components of operating cash flows, we find both investing cash flows and FCF persist higher into future earnings as well as possess higher valuation weights than accruals. However, investing cash flows has higher valuation weight than FCF even FCF persists higher than investing cash flows. Our findings are important, especially due to recent Worldcom accounting scandal. Wordcome misclassified the operating cash outflows into investing cash outflows. This misclassification overstates earnings, overstates investing cash outflows simultaneously but has no effect on FCF. The market’s excessive weight on investing cash outflows implies potentially more adverse impacts from such a misclassification than accruals manipulation.