Value relevance of earnings and cash flows - a revisit

Abstract

This study examines the value relevance of earnings and operating cash flow (OCF) using a U.S. sample from 1989 to 2019. First, I continue to find significant value relevance of earnings and OCF for this long sample period till recent. Second, I document the trend of the value relevance of the two accounting numbers over the past three decades and find that the value relevance of earnings is decreasing over the sample period, while the additional value relevance of OCF does not have a significant change, implying that other information than OCF are providing supplementary information to compensate the decreasing information content in earnings. Third, I find the value relevance of earnings and OCF are affected by information environment. I proxy information environment by firm size, media coverage and analyst following. Consistent with the hypothesis that the response coefficients of the accounting numbers can be higher when the information environment improves the quality of the numbers, my results indicate that the value relevance of earning and OCF is higher for firms with better information environment. We also find that the supplementary role of OCF for earnings reduced when size and number of analysts following are larger.