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Prior studies provide mixed propositions on whether earnings levels or earnings changes provide the better explanatory power for variations of stock returns and whether the time-series behavior of earnings affects the value relevance of both earnings variables. This paper aims to compare the value relevance of earnings levels with that of earnings changes in the return-earnings relations.

The unobservable components model is used to estimate permanent and transitory components of earnings.

The finding shows that the proxy ability of earnings changes for unexpected earnings is sensitive to a firm's time-series earnings permanence property and is unstable and noisy when earnings contain predominantly transitory components, but that of earnings levels is not. The results support earnings levels are a stable and better value relevant proxy in the return-earnings relations.

The findings imply that the valuation role of earnings levels is important in the research relating to earnings components, earnings innovations, and equity valuation, especially when earnings permanence is of interest.

The results provide a new understanding on the role of earnings levels in many business decisions such as executive compensations, institutional investment and conservative accounting where they often involve the choice of using levels and/or changes of earnings variables in making decisions.

The paper contributes to the accounting literature by providing a new insight into the valuation role of earnings levels in the return-earnings relations. The stable value relevance of earnings levels also has important implications, especially for studies that use only earnings levels to assess earnings quality and earnings attributes.

Forecasting future period profitability is widely identified as an aim of financial statement analysis, and these forecasts are typically relied upon for the estimation of firm value. To facilitate this, the decomposition of earnings into its components or drivers, is typically advocated. This paper investigates the existence of systematic differences in persistence across the components of earnings. If components of earnings experience differences in persistence, this may provide insights into the determinants of aggregate earnings level and persistence. This paper provides evidence of differences in persistence between components of earnings. Differences are found between components formed on the basis of: financial ratios; operating and financing activities; and cash and accruals. Furthermore, there is evidence that earnings components improve the explanatory power of models evaluating aggregate earnings persistence, with this result being strongest for firms with extreme income decreasing accruals. Due to the pivotal role of earnings in firm valuation, the results from this paper have direct implications for valuation.

The purpose of this study is to examine whether financial analysts mislead investors in recognizing the differential persistence of the three cash flow components of earnings, defined by Dechow et al., in forecasting annual earnings.

The paper uses Mishkin's econometric approach to compare the persistence of the cash flow components within and across the historical, analysts' and investors' weightings.

It is found that financial analysts' weightings of the cash flow components are more closely aligned with the historical relations than are investors' weightings, both in direction and in magnitude. The degree of analysts' mis‐weighting is economically small and much lower than the degree of investors' mis‐weighting. Moreover, the extent of both investors' and analysts' mis‐weightings of the cash components is generally smaller for firms with greater levels of analyst following, a proxy for the quality of the information environment.

The findings suggest that financial analysts' bias in weighting the cash components of earnings is at best a partial explanation for investors' bias.

This study is important to academics and the investment community that relies upon financial analysts as information intermediaries, because the ability of analysts to incorporate value‐relevant information in their published expectations may impact securities prices.

The study is the first to document the weightings of the cash components of earnings by financial analysts. In addition, this paper provides evidence that financial analysts, as information intermediaries, are less biased than investors in processing not only the accrual but also the cash components of earnings.

Recent research examines the implications of components of accruals for future profitability. Because the persistence of earnings varies with the level of company profitability, we expect differences between profitable and loss‐making companies in the association between components of accruals and future profitability. Using the approach adopted by Richardson, Sloan, Soliman and Tuna (2006) we find evidence suggesting that the components of accruals related to revenue growth and to change in asset turnover are less persistent than the cash flow component of earnings for profitable Australian companies. For loss‐making companies, however, the persistence of the accrual component of earnings is found to be higher than for the cash flow component of earnings, suggesting that the accrual component is more informative than the cash flow component in explaining period ahead profitability for many currently unprofitable companies.

This paper seeks to examine the persistence of earnings and earnings components after the adoption of International Financial Reporting Standards (IFRS).

The study analyses two years before and two years after the adoption of IFRS in order to examine whether the adoption of IFRS materially affects the persistence, as well as the explanatory power of earnings and earnings components.

The results confirm that disaggregating reported earnings into operating income, non‐operating income and extraordinary charge and credit, captures differences in the information content of the underlying events. Consequently, earnings disaggregation can be used to improve prediction of future profitability. The results suggest that IFRS measurement and reporting guidelines do not seem to improve the persistence of earnings and earnings components.

This is the first study that examines whether the mandatory adoption of IFRS has an impact on the information content of earnings components for future profitability.

The purpose of this paper is to investigate the effect of audit quality on the market pricing of earnings and earnings components in China.

The paper measures audit quality using three tiers of audit firm designation, namely International Big 4 audit firms, local Top 10 audit firms and, finally, the local second-tier audit firms. Earnings are decomposed into accruals and cash flow components and accruals are further decomposed into discretionary and non-discretionary accruals.

The paper finds that, although earnings and its components are priced positively by the Chinese stock market, Big 4 audit does not provide any incremental benefit to clients in terms of market pricing of clients’ financial numbers. The paper finds a negative impact of local Top10 audit on the pricing of earnings in China. However, the paper finds no incremental effect of local Top 10 audit on the market pricing of earnings components.

Although prior research in China has used modified audit opinion as the audit quality matrix, the paper considers market valuation of earnings and earnings components for firms audited by different categories of auditors.

Recent studies on the securities market's differential pricing of earnings components indicate that cash flows from operations are valued more highly than extreme total accruals. However, no previous study has examined whether cash flows from operations have a higher valuation than moderate total accruals. Therefore, this study examines the securities market's differential pricing of cash flows from operations and both moderate and extreme total accruals.

The study's sample is divided into two sub-samples: a moderate total accruals sub-sample; and an extreme total accruals sub-sample. To evaluate whether cash flows have a higher valuation when compared to total accruals, for the entire sample and for each of the two sub-samples, the study examines the statistical significance of the difference between slope coefficients of cash flows and total accruals for regression of returns on both unexpected cash flows from operations and unexpected total accruals.

Consistent with prior research, results from the entire sample show a differential higher valuation of cash flows when compared to total accruals. Another finding, consistent with recent studies, is that cash flows from operations have a higher valuation when compared to extreme total accruals. However, there is no higher differential valuation of cash flows over moderate total accruals. These findings support the decomposition of earnings into the components of cash flows from operations and total accruals only when total accruals are extreme (rather than moderate).

A possible explanation for these results is that since accruals predict cash flows, total accruals – when moderate (i.e. not extreme) – are priced similarly to cash flows. These results reveal that when total accruals are moderate, earnings are a better proxy for the underlying cash flows (over the entire future horizon, not just the current period) than is cash flows. However, since total accruals are unlikely to persist in a permanent way over the years, these results indicate that the decomposition of earnings into the components of cash flows from operations and total accruals is consistent with the information set used to value equity securities. Therefore, separate disclosure of cash flows is value relevant. In addition, users of financial statements certainly need the cash flows information as an ex-post validation of the prior earnings.

This study's contribution stems from its determination of the preferred level of disaggregation of earnings components (i.e. operating cash flows and total accruals). This is expected to help investors in their attempt to enhance the outcome of their informed investment and credit decisions.

This study aims to examine whether accounting comparability between two firms, as measured by De Franco et al. (2011), reflects closeness in the amounts of cash flows and accruals between the firms.

Using 278,452 pair-year observations over the years 2003–2019, the author evaluates the research question using regression models.

Closeness in cash flows and closeness in accruals both increase accounting comparability and the effect of closeness in cash flows is greater. The effect of closeness in earnings is greater than the combined effects of closeness in cash flows and accruals. Earnings quality strengthens, while product closeness weakens, the effects of closeness in earnings and closeness in cash flows.

To the best of the authors’ knowledge, this study is the first to empirically test the link between the closeness in earnings components and accounting comparability. This study is also the first to examine cash flows versus accruals in the context of accounting comparability.

The purpose of this paper is to assess the value relevance of product diversification in US commercial banks.

The paper examines differences in the value relevance of commercial bank earnings components from interest and noninterest banking activities. Specifically, it studies market reaction to changes in bank earnings from noninterest sources resulting from expansion into new financial services other than the traditional intermediation activities. A sample of commercial banks between 1993 and 2002 is used.

Results show that annual abnormal returns have more significant positive relation with changes in the noninterest component of bank earnings compared with changes in the interest component of earnings. These results are more obvious for small banks and after 1999, the year in which the Gramm‐Leach‐Bliley Act allowed banks to expand into more noninterest banking activities.

This paper is an extension of the long and extensive accounting research strand in the value relevance of earnings applied to bank earning components. It may also contribute to banking and Finance literature regarding the effect of product diversification in the banking industry.

The purpose of this paper is to investigate the impact of the components of the bid‐ask spread around earnings announcements on the London Stock Exchange using intraday data obtained from the ICV Marketeye database. The paper finds that the information asymmetry cost component significantly increases around the earnings announcements, while the inventory holding and order processing cost components significantly decrease around the same period. Specifically, the economic magnitude of the increase in the asymmetric cost component implies that earnings announcements significantly increase the total bid‐ask spread, even when they result in decreased inventory holding and order processing costs.

Liquidity in financial markets around earnings announcements in the London Stock Exchange obtained by bid‐ask spread decompositions.

This paper investigates the impact of earnings announcements on the components of the bid‐ask spread on the London Stock Exchange using intraday data. The fundamental conclusion from the empirical findings is that the bid‐ask spread increases once the earnings have been announced, because the market makers' increased concerns about asymmetric information is more pronounced, than the lower inventory and order processing costs due to the higher levels of trading volume. This empirical finding also holds when the earnings announcements are partitioned into positive and negative surprises.

This is the first paper to decompose the bid‐ask spread around earnings announcements on the London Stock Exchange. The paper uses a unique intraday dataset.