What is more relevant? A comparison of cash flows indicators versus profit or loss from listed European companies

Abstract

AbstractThere is still controversy regarding the relevance of cash flow versus accruals. Relevant information can be assessed in multiple ways, including its value relevance and predictability. This paper then compares the value relevance and predictive value of accruals and cash flow measures to determine entities’ stock value and future cash flows, respectively. The data was obtained from 484 consolidated annual reports of 121 companies listed on Euronext between 2018 and 2021. Data assessment used a linear regression model. The findings suggest that cash flow measures have a more significant influence on stock prices than profit or loss (about 40% versus 20%, based on the models’ explanatory power). Furthermore, historical cash flows are proven to be a better predictor of future cash flows than profit or loss (90% versus 80%). Furthermore, neither accrual nor cash flow measures forecast future profit or loss significantly (below 35% in all cases). Findings also indicate a reduced capability of accrual or cash flow measures to forecast future profit or loss. This paper contributes to the ongoing debate on the relevance of cash flow versus accrual measures, which still presents differing conclusions. As part of its innovation, it compares profit or loss with multiple cash flow measures, such as non-GAAP measures and the concept introduced by the IASB in its exposure draft for operating cash flow. Additionally, the study examines the potential impacts and benefits of changes proposed in the IASB’s exposure draft, including how they can affect stock prices and forecast future cash flows.

Keywords

• cash flows
• exposure draft
• relevance
• value relevance
• predictive value