The Effect Of Accounting Regime Characteristics On The Prediction Of Future Cash Flows: An International Comparison

Abstract

For nine countries, we show that the components of accrual accounting earnings provide information incremental to that of current cash flows from operations in explaining next year’s cash flows from operations. We relate the usefulness of accounting earnings components for explaining near-term cash flows to certain country characteristics—common/code-law jurisdiction, accrual index, shareholders’ rights, and uncertainty avoidance. We provide evidence that accounting accruals generated by shorter horizon, code-law regimes provide more incremental explanatory power for short-term predictions than those of longer horizon, common-law countries.