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The Incremental Information Content of Earnings, Working Capital from Operations, and Cash Flows

1994; Wiley; Volume: 32; Issue: 1 Linguagem: Inglês

10.2307/2491387

1475-679X

Ashiq Ali,

Corporate Finance and Governance

Prior studies have documented the information content of earnings for share prices but have not provided conclusive evidence on the incremental information content of working capital and cash flows from operations.' These studies assume linear relations between abnormal returns and accounting information. In this paper, I extend prior research by allowing for nonlinear relations between returns and each of three performance variables (earnings, working capital from operations [WCFO], and cash flows). Freeman and Tse [1992a] document a nonlinear relation between abnormal returns and unexpected earnings. They argue that as the absolute value of unexpected earnings increases, the persistence of earnings declines (Brooks and Buckmaster [1976] and Freeman, Ohlson,