The incremental information content of cash-flow components

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Abstract

This study examines whether components of operating, financing, and investing cash flows are differentially associated with annual security returns, as predicted by theoretical models in finance and economics. The results of the study indicate that disaggregation of net income into cash from operations and accruals does not contribute significantly to the security returns beyond the contribution of net income alone. However, further disaggregation of financing and operating cash flows into their components significantly improves the degree of association as predicted by theory. In contrast, we find no evidence of differential associations across components of investing cash flows.

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    The authors are grateful to Ray Ball (editor), Victor Berard (referee), Ashiq Ali, Ross Jennings, April Klein, Baruch Lev, Robert Lipe, Victor Pastena, Grace Pownall, Judy Rayburn, Joshua Ronen, George Sorter, and participants of the Accounting Seminars at Baruch College, Columbia University, and New York University for their helpful comments. All errors remain our responsibility. We are thankful for obtaining Summer Research Grants from the Stern Graduate School of Business, New York University. The second author acknowledges financial support provided by the KPMG Peat Marwick Foundation.

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