Accruals and Cash Flows in Explaining Stock Returns

Abstract

The purpose of this paper is to examine the explanatory power of accruals and cash flows in explaining stock return in Tehran Stock Exchange. Ball and Brown (1968) began research on the relationship between accounting earnings and firm value. Following them, in last five decades, accounting research has produced a significant volume of research on the relationship between accounting earnings and firm value. Earnings consist of accruals and cash flow components and question about information content of earnings components is considered by capital market participant. This paper attempts to gather empirical evidence on this issue. In so doing, we used of financial data of 111 firms listed in TSE during 2003-2009. The results show the information content of earnings is relatively better than the cash flow.

Keywords

• Accounting Earnings; Accruals; Cash Flow; Stock Return