The predictive ability and value relevance of accounting measures

Abstract

Empirical accounting research sometimes assumes that the value relevance of accounting variables can be indirectly assessed by studying the ability of the variables to forecast future cash flow and earnings. This study investigates the relationships between short-term cash flow and earnings prediction tests and value relevance analyses. I find that earnings prediction tests might be good substitutes for value relevance analyses, whereas cash flow prediction tests merely provide indications with respect to value relevance. Cash flow prediction tests appear unable to capture the significant association between accounting accruals and the company value. Overall, this study suggests that the value relevance of accounting variables can be investigated through their ability to predict future earnings but not future cash flow.