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
Review of Accounting Studies – Springer Journals
Published: Sep 30, 2004
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