|
Abnormal Operating Cash Flows: Applications for Forecasting Financials, Predicting Earnings Restatements, and Selecing Portfolios
Jianming Ye, Baruch College
Masako Darrough, Baruch College - CUNY
ABSTRACT. Much of research in accounting focused on the decomposition of accruals into discretionary and non-discretionary components. In this paper, we decompose cash flow from operations into normal and abnormal components and show that the decomposition offers several important applications. First, it improves the models for forecasting future earnings and especially future cash flows. Secondly, low abnormal cash flows are useful in predicting accounting restatements, since they often represent unexpectedly poor operating performance, which tends to exert pressure on firms to manage earnings. Finally, compared to the accruals strategy in selecting portfolios, the abnormal cash flow strategy yields significantly higher returns for the largest firms, which cover 90% of market capitalization.
Full-Text is no longer available online. Please contact the author(s) for more information about this manuscript.
Back to Session Listing
|