Do core and non-core cash flows from operations persist differentially in predicting future cash flows?

Cheng-shing Cheng, Dana Hollie

Research output: Journal article publicationJournal articleAcademic researchpeer-review

34 Citations (Scopus)

Abstract

This study investigates the persistence of cash flow components (core and non-core cash flows) using a cash flow prediction model. By extending the Barth, Cram, and Nelson (Account Rev 76(January):27-58, 2001) model, we examine the role of cash flow components in predicting future cash flows beyond that of accrual components. We propose a cash flow prediction model that decomposes cash flows from operations into core and non-core cash flow components that parallel the presentation and format of operating income from the income statement. Consistent with the AICPA and financial analysts' recommendations, and as predicted, we find that core and non-core cash flows defined in our paper are differentially persistent in predicting future cash flows; and these cash flow components enhance the in-sample predictive ability of cash flow prediction models. We also analyze the association of in-sample prediction errors with earnings, cash flow and accruals variability. We find that disaggregating cash flows improve in-sample prediction, especially for large firms with high cash flows and earnings variability.
Original languageEnglish
Pages (from-to)29-53
Number of pages25
JournalReview of Quantitative Finance and Accounting
Volume31
Issue number1
DOIs
Publication statusPublished - 1 Jul 2008
Externally publishedYes

Keywords

  • Cash flow prediction
  • Cash flow variability
  • Cash flows
  • Core cash flows

ASJC Scopus subject areas

  • Accounting
  • Business, Management and Accounting(all)
  • Finance

Cite this