The Ability of Accruals and Cash Flows to Predict Future Abnormal Earnings: Evidence from Amman Stock Exchange

Abstract

This paper extends the research on the ability of accruals and cash flow components of earnings, to predict future abnormal earnings, which helps in equity valuations. Results from the Amman Stock Exchange provide insights into the ability of accruals and cash flows components of earnings in forecasting future abnormal earnings. First, the results show that accruals and cash flows are value-relevant in forecasting future abnormal earnings. In addition, accruals and cash flows have forecasting relevance since each has a significant relationship to future abnormal earnings. There is considerable cross-industry variation in the magnitude of the estimated coefficients for components in the abnormal earnings forecasting equation. Second, the findings indicate that the autoregressive process of accruals and cash flows is stationary. In addition, accruals are less persistent than cash flows for all industries. These results mean that accruals are less permanent in the future, compared with cash flows in banks, industrial, insurance, and services companies. Finally the results suggest that accruals and cash flows explain the market values of equities.