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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.

In response to recent concerns on earnings quality and a firm's fundamental performance, the purpose of this paper is to re‐examine salient questions under accrual accounting: how earnings quality affects the role of earnings and operating cash flows in a firm's valuation.

Using a large sample ranging from 1989 to 2008, the authors contrast the effects of three representative accrual‐based earnings quality measures on the association between earnings, operating cash flows and a firm's abnormal stock returns.

In the univariate analysis it was found that earnings explain returns similarly to operating cash flows. With control of earnings quality, the results indicate that earnings' role in explaining contemporaneous abnormal returns remains unchanged when earnings quality is better. Conversely, operating cash flows explain more contemporaneous abnormal returns when earnings quality is better. The findings could suggest that the market reacts to operating cash flows conditionally on earnings quality. Intriguingly, the results also indicate that the market perceives better earnings quality captures superior performance of operating cash flows rather than that of earnings. These findings are further fortified by additional analyses revealing that the earnings quality measure with control of operating cash flows affects the supplemental role of operating cash flows most.

The paper's findings provide insights on how the market processes firm value signals embedded in earnings quality, which have direct implications for regulators, standard setters, academics and practitioners.

This paper estimates the value added by Big 8/6/5 auditors after controlling for the permanent and non‐permanent impact of earnings and cash flows using linear and nonlinear (arctan) regression models. The linear model shows significant value added for industrial firms that utilise Big 8/6/5 auditors; while an arctan model shows that large auditors value‐add by attesting to the permanence of earnings for large firms. We demonstrate that refinements to the audit research can be made by using response coefficients to filter out the different timing components inherent in earnings and cash flows.

To examine whether both the value relevance of accounting information, and the quality of earnings affect financial analysts' revisions of forecast annual earnings per share soon after an earnings release.

For firms whose accounting earnings provide either a basis for firm valuation or new information, analysts are predicted to revise earnings forecasts in response to the magnitude of surprise in the earnings release. Using publicly available data, regression analysis explores the influence of earnings response coefficients (ERCs), unexpected earnings, and interactions between ERCs, the association between earnings and returns, and unexpected earnings on forecast revisions after earnings announcements.

Empirical tests demonstrate a positive relation between the percentage of analysts revising forecasts soon after interim earnings announcements and firm‐specific ERCs, the interaction between the magnitude of earnings surprises, ERCs, and earnings‐returns associations, and pre‐announcement dispersion in forecasts. The results suggest that usefulness of earnings releases is related to the magnitude of new information in the release, the persistence of earnings innovations, the firm‐specific mapping between earnings and returns, and prior uncertainty about earnings.

This paper examines forecast revisions only soon after earnings announcements. Future research should examine more general determinants of analysts' forecast revision activity.

This paper provides evidence about determinants of forecast revision frequency, a measure of how actively financial analysts provide information, an extension of prior research that focuses on analyst following as a measure of information environments.

In contrast to earlier studies, the most recent studies on the incremental value relevance of earnings and cash flows from operations find that both earnings and cash flows have incremental value relevance beyond each other. An interesting question that follows is whether these findings hold after controlling the extremity of earnings and cash flows. This study, therefore, aims to examine the incremental value relevance of earnings and cash flows in the following four cases: moderate earnings and moderate cash flows, moderate earnings and extreme cash flows, extreme earnings and moderate cash flows and extreme earnings and extreme cash flows.

To evaluate the incremental value relevance (information content) of earnings and cash flows for each of the four cases mentioned above, we examine the statistical significance of the slope coefficients for regression of returns on both unexpected earnings and unexpected cash flows from operations.

The results show that (i) both moderate and extreme earnings have incremental value relevance beyond both moderate and extreme cash flows, (ii) moderate cash flows have incremental value relevance beyond both moderate and extreme earnings and (iii) extreme cash flows lack incremental value relevance beyond moderate earnings; however, they (extreme cash flows) have incremental value relevance beyond extreme earnings. These results suggest that earnings and cash flows have incremental value relevance. However, only in cases when cash flows are extreme and earnings are moderate, cash flows do not possess incremental value relevance. In further analysis, we find that the value relevance for cash flows and earnings decreases when they are extreme and transitory. Moreover, the value relevance for cash flows increases when they are moderate (not extreme) and the other competing measure (earnings) is transitory and extreme.

The results support the idea that earnings and cash flows from operations complement each other in explaining variation in returns. However, when cash flows are extreme and less informative, investors rely more on earnings in firm valuation, especially when earnings are moderate. Because earnings are unlikely to persist to be permanent across the years, these results can be interpreted as indicating that cash flows and earnings information are used jointly by investors.

In contrast to previous studies, we control for the extremity of earnings and cash flows when evaluating the incremental value relevance of earnings and cash flows from operations.

The fundamental relationship between accounting variables and firm valuation is a recurring theme in capital market research. This paper investigates this relationship within a balance sheet context and highlights the importance of controlling for relevant economic factors. We do this by conditioning explanatory power on the firm's relative financial leverage position, after controlling for cashflows and firm size, and using an arctan regression model to take account of temporary components in cash and earnings flows. Using data for 743 firm‐years for Australian Stock Exchange listed stocks, we find that for firms which are ‘above optimal leverage’: (i) earnings contain a greater level of transitory items, particularly when firm size is small; and (ii) cashflows provide higher incremental information. Our results are consistent with investors perceiving earnings as progressively less informative as the probability of failure increases, and the likelihood of earnings manipulation for the purpose of reducing proximity to debt covenants increases.

The role of accounting information in setting security prices is one of the most fundamental issues in accounting and finance. The purpose of this study is to extend the research on the value relevance of accounting numbers in three important directions. Firstly, we consider the French context and analyze if earnings and/or cash flows are relevant to explain stock returns. Secondly, we test whether the explanatory power of accounting variables can be improved by using a nonlinear specification. Thirdly, we investigate how firm‐specific attributes such as size, debt level and firm life‐cycle influence the relative relevance of accounting measures (earnings and cash flows). Our results support a nonlinear relationship between stock returns and accounting variables. They indicate also that the relevance of earnings is conditional on size, debt level and life cycle of the firm. In contrast, the earnings change reveals more information when the firms are large, mature or characterized by a low degree of debt. These results are consistent with difference in earnings persistence between firms. With regards to cash flows, we find that they do not reveal additional information beyond that contained in earnings.

This paper examines the value relevance of operating cash flows in consideration of potential weaknesses in earnings quality in the context of a merger. When two firms merge, the earnings stream is altered reflecting the new entity that is created thus, making the prediction of future earnings challenging due to weaknesses in the quality of earnings. The quality of generally accepted accounting principle (GAAP) earnings, has recently been questioned by investors, analysts, and regulators. The difficulty with merged firm earnings has been exacerbated because, prior to June 2001, generally accepted accounting principles (GAAP) allowed firms to account for a merger using either the purchase or the pooling method of accounting. While the pooling method has been eliminated, this paper hypothesizes that difficulties arising from the purchase method of accounting will still exist and will continue to reduce the role of earnings in explaining security returns, and, consequently, the value‐relevance of operating cash flows is expected to increase as investors search for additional means to explain security returns. This paper finds that in the year of the merger, operating cash flows provide valuerelevant information beyond earnings. This finding supports the hypothesis that the quality of earnings in the year of the merger is difficult to interpret, and given this weakness, cash flows can aid in the explanation of abnormal security returns. Additional analyses indicate that the value‐relevance of operating cash flows is positively associated with the purchase method of recording the merger. This result is consistent with operating cash flows assuming a more important role in firm valuation when the difficulties in estimating the merged firm’s earnings are more severe. These findings also suggest that earning’s quality is more value relevant in a non‐merger year than in a merger year.

Motivated by the lack of research on the value relevance of accounting information in the emerging markets of Middle Eastern countries, and the unique institutional and accounting setting in Egypt, this paper aims to investigate the relation between capital market and accounting information in the emerging market of Egypt. Specifically, based on Egyptian data, this study examines the value relevance of earnings, cash flows from operations and book values.

To examine the value relevance of the above accounting measures, this study uses statistical associations between accounting information and capital market values: the association between earnings and annual returns; the association between cash flows and accruals, and annual returns; and the association between earnings and book values of equity, and stock prices.

The results show that, first, earnings have value relevance. However, earnings changes are significantly more successful than earnings levels in explaining security returns. These results suggest that changes in earnings are largely permanent; hence, earnings follow (close to) a random walk model. Second, contrary to what is stated in the literature, cash flows from operations are not successful in explaining stock returns. This result suggests that cash flows are less important and not value relevant in Egypt compared to the USA or the UK. A possible explanation is that cash flows in Egypt are very volatile (high variance) and not persistent, so the market does not rely on them. Third, individually, both earnings and book values significantly explain stock prices; however, jointly, earnings have incremental explanatory power beyond book values for stock prices whereas book values do not. These results suggest that in Egypt the income statement is much more important than the balance sheet for valuation purposes. Overall, these results are interesting because they do not completely replicate the results from other countries.

The existence of value relevance for earnings despite the apparent lack of value relevance for cash flows can be interpreted as indicating that accruals are designed to offset and smooth cash flows’ volatility and low value relevance, so that earnings are relatively more persistent and relevant. These results show that earnings potentially are a much more important and informative measure of a firm’s value than cash flows from operations in Egypt. However, we certainly need the cash flows information as an ex-post validation of the prior earnings. Overall, it appears that the investors in Egypt are looking at the accounting data when evaluating the value of the firm, which is a good sign. However, the empirical findings of this paper are discussed.

This study contributes to the limited research on value relevance of accounting information in the emerging market of Egypt.

The purpose of this paper is to investigate the incremental value relevance of cash flow from operations (CFO) given book value and earnings. It also examines the relative value relevance of earnings and CFO and changes therein between the 2008‐2009 global financial crisis (GFC) and the pre‐crisis period (PCP).

Least square regressions are estimated using modified Ohlson model to examine the research questions. Relative and incremental value relevance is examined by adjusted R² and Vuong Z statistics.

The findings suggest that CFO has value relevance incremental to book value and earnings. The findings also suggest that earnings has greater relative and incremental information content than CFO in the Australian market. The value relevance of earnings has increased and that of CFO has decreased during the GFC compared to the PCP.

This study focuses on a single country. Future studies can conduct cross‐country examination of the impact of the GFC on the value relevance of earnings and CFO.

This study contributes to the debate on the value relevance of CFO incremental to book value and earnings. It also extends the literature, showing that earnings has information content (value relevance) superior to CFO in the Australian market even during an economy‐wide exogenous shock like the one of the 2008‐2009 GFC.

This is the first known study examining the value relevance of fundamental accounting information such as earnings and CFO in the context of the 2008‐2009 GFC. It extends prior research in East Asian countries in the context of 1997 Asian financial crisis and provides evidence on the impact of a world‐wide exogenous shock on the value relevance of earnings and CFO from a relatively mature and developed country with different legal, institutional and enforcement backgrounds.