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The Role Of Accruals In Predicting Future Cash Flows And Stock Returns

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Executive Summary

The authors revisit the role of the cash and accrual components of accounting earnings in predicting future cash flows using out-of-sample predictions, firm-specific regression estimates, and different levels of aggregation of the dependent variable, with market value of equity as a proxy for all future cash flows. They find that, on average, accruals improve upon current cash flow from operations in predicting future cash flows. As accruals' contribution to the prediction of future cash flows varies significantly across firm-quarters, they proceed to investigating determinants of accruals' predictive ability for future cash flows. They find that positive accruals are more likely to improve upon current cash flow in predicting future cash flows.

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