Corporate Liquidity And The Significance Of Earnings Versus Cash Flow

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Carol Lancaster
Jerry L. Stevens


corporate liquidity, cash flow


This paper replicates and extends prior work appearing in this journal on the relationship between liquidity and accrual income versus cash flow. The measure of corporate liquidity is expanded to include both static liquidity (current and quick ratios) and dynamic liquidity (cash conversion cycle). The analysis is also extended to more recent data. Prior conclusions on the insignificance of cash flow from operations in explaining liquidity are revised. Cash flow from operations is significantly related to both the current ratio and the cash conversion cycle and has significant incremental explanatory power relative to accrual income. Statistical significance of cash flow from operations in explaining the quick ratio is sensitive to the sample period and is more difficult to generalize.


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