Discussion of “Accruals, Cash Flows and Equity Values”

Discussion of “Accruals, Cash Flows and Equity Values” 232 RICHARD G. SLOAN predict,’ and so simply test the null hypothesis that these variables have no information content. In my (possibly biased) opinion, some of the most exciting research in this area takes on the admittedly difficult task of predicting the relative information content of cash flows and accruals. For example, Dechow (1994) hypothesizes that if accruals correctly employ accountants’ matching principle, then the cash flow and accrual components of earnings should have similar forecasting properties, such that no information should be lost in aggregating these two components of earnings. Sloan (1996) challenges this hypothesis, suggesting that accruals may be less informative than cash flows because they are less reliable and thus more susceptible to estimation error and managerial manipulation. In support of this hypothesis, Sloan shows that accruals are, on average, less informative than cash flows in forecasting future earnings. Recent papers by Dechow, Kothari and Watts (1998), Dechow, Sabino and Sloan (1998), Fairfield and Yohn (1999) and Xie (1998) offer further insights into the forecasting properties of accruals versus cash flows. 2. Valuation of Accruals and Cash Flows The most innovative feature of BBHL is the use of Ohlson’s (1999) valuation framework, which is basically an http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Review of Accounting Studies Springer Journals

Discussion of “Accruals, Cash Flows and Equity Values”

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Publisher
Kluwer Academic Publishers
Copyright
Copyright © 1999 by Kluwer Academic Publishers
Subject
Business and Management; Accounting/Auditing; Corporate Finance; Public Finance
ISSN
1380-6653
eISSN
1573-7136
D.O.I.
10.1023/A:1009682117424
Publisher site
See Article on Publisher Site

Abstract

232 RICHARD G. SLOAN predict,’ and so simply test the null hypothesis that these variables have no information content. In my (possibly biased) opinion, some of the most exciting research in this area takes on the admittedly difficult task of predicting the relative information content of cash flows and accruals. For example, Dechow (1994) hypothesizes that if accruals correctly employ accountants’ matching principle, then the cash flow and accrual components of earnings should have similar forecasting properties, such that no information should be lost in aggregating these two components of earnings. Sloan (1996) challenges this hypothesis, suggesting that accruals may be less informative than cash flows because they are less reliable and thus more susceptible to estimation error and managerial manipulation. In support of this hypothesis, Sloan shows that accruals are, on average, less informative than cash flows in forecasting future earnings. Recent papers by Dechow, Kothari and Watts (1998), Dechow, Sabino and Sloan (1998), Fairfield and Yohn (1999) and Xie (1998) offer further insights into the forecasting properties of accruals versus cash flows. 2. Valuation of Accruals and Cash Flows The most innovative feature of BBHL is the use of Ohlson’s (1999) valuation framework, which is basically an

Journal

Review of Accounting StudiesSpringer Journals

Published: Sep 30, 2004

References

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