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- The Relative and Incremental Merits of Cash Flows and Earnings: The Case of Egypt
The Relative and Incremental Merits of Cash Flows and Earnings: The Case of Egypt
Auteur :
Mostafa
Wael
Année de Publication :
2011
Type : Article
Thème : Finances
Couverture :
Maroc
URL Article :
http://www.eurojournals.com/MEFE_15_03.pdfURL Source :
http://www.eurojournals.com 
Télécharger le document :
(343,45 kB) The Relative and Incremental Merits of Cash Flows and Earnings.pdfRésumé/Sommaire :
This study examines the relative and incremental merits of cash flows from operations and earnings in the emerging market of Egypt. We examine the relative and incremental merits of cash flows and earnings from three perspectives. First, we compare and contrast the properties of cash flows from operations and earnings in terms of persistency and variability. Second, we examine the relative and incremental value relevance of cash flows from operations and earnings. Third, we assess the relative and incremental predictive ability of cash flows from operations and earnings to predict future cash flows from operations.
Persistency and variability of cash flows and earnings results show that, compared with cash flows from operations, earnings have a lower variability and a higher persistency. Value relevance of cash flows and earnings results show that, (i) compared with cash flows from operations, earnings have greater relative value relevance, (ii) earnings have incremental value relevance beyond cash flows from operations whereas cash flows do not and (iii) cash flows from operations are not successful in explaining stock returns. Prediction of future cash flows results show that (i) earnings and cash flows are equivalent in prediction of future cash flows and (ii) earnings and cash flows together perform as well as either earnings or cash flows alone in prediction of future cash flows.
These results are consistent with much evidence in the United States and the United Kingdom. However, in contrast to the results of U.S. and U.K. studies, cash flows are not significantly associated with stock returns. This result indicates that cash flows are less important and not value relevant in Egypt compared to U.S. or U.K. However, earnings that are cash flows from operations (that do not have value relevance in this study) adjusted for accruals still have value relevance. The reasons behind these results demand further investigation. One possible interpretation for the apparent lack of value relevance for cash flows from operations is that cash flows in Egypt are very volatile (high variance) and not persistent, so the market does not rely on them. The existence of value relevance for earnings despite cash flows’ lack of value relevance suggests that accruals are designed to offset cash flows’ volatility and low value relevance, so that earnings are relatively smooth and more reliable. These results are interesting because they don’t completely replicate the results from other countries. In general, accrual accounting seems to smooth the cash flows time series leading to more relevance and persistence for earnings.
Collectively, lower variability and higher persistency combined with a stronger association with market value and equivalent measure to cash flows in prediction of future cash flows make earnings potentially much more important and informative measure of operating performance than cash flows from operations in Egypt. However, we certainly need the cash flows information as an ex-post validation of the prior earnings.
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