The relative predictive ability of earnings and cash flows: Evidence from Shariah compliant companies in India
Abstract
Purpose
The purpose of this paper is to examine the relative predictive abilities of current earnings (and its components) and cash flows for next period cash flows in case of Shariah-compliant companies in India.
Design/methodology/approach
The study uses the list of CRISIL NSE Index (CNX) Nifty Shariah Index companies as its sample for a period of 10 years for conducting the analysis. The study utilizes the cash flow prediction models to examine the relative predictive abilities of current earnings (and its components) and cash flows for next period cash flows.
Findings
The study report that contrary to Financial Accounting Standard Board assertion, current cash flows have superior predictive ability of next period cash flows than current aggregate earnings in case of Shariah-compliant companies in India. The results further show that there are no gains from decomposing earnings into accruals and cash flows in predicting future cash flows. There is no increase in explanatory power (measured by adjusted R2) when aggregate earnings are disaggregated into accruals and cash flows to predict next period cash flows.
Practical implications
The empirical findings of the study will enable the Shariah compliant investors to understand the role of current earnings (and its components) and cash flows in predicting next period cash flows in case of Shariah-compliant companies in India.
Originality/value
To the best of author’s knowledge, this is the first study which examines the relative predictive abilities of current earnings (and its components) and cash flows for next period cash flows in case of Shariah-compliant companies in India.
Keywords
Citation
Dawar, V. (2015), "The relative predictive ability of earnings and cash flows: Evidence from Shariah compliant companies in India", Management Research Review, Vol. 38 No. 4, pp. 367-380. https://doi.org/10.1108/MRR-06-2013-0156
Publisher
:Emerald Group Publishing Limited
Copyright © 2015, Emerald Group Publishing Limited