Literature Review On Financial Management

The random walk provides better out-of-sample forecasts than do individually estimated models one year ahead for 52% of the sample firms, Out of sample forecasts show that random walk models outperform individually estimated earnings models for one-year but not for four- or eight-year horizons.Earnings, used alone and with cash flow, are a significant predictor of cash flow for the majority of firms.

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This study relates to examine the relationship of cash flow from operations, earning and sales with share price and the previous research has predicted the comparative abilities of cash flow, earning and sales but this study is only concerned with the relationship of cash flow, earning and sales with share price.

In the finance literature that market forces determine share price equal to the discounted value of a stream of expected future cash flows (Hollister et al., 2002).

These first two results are consistent with earnings and alternative measures of CF that incorporate more extensive adjustments conveying different signals.

Finally, for four out of five cash flow variables, the results are consistent with the hypothesis that random walk models predict CF as well as (and often better than) models based on other flow variables.

The nature of the information contained in the accrual and cash flow components of earnings and the extent to which this information is reflected in stock prices Sloan (1996).

It is found that earning performance attributable to the accrual component of earnings exhibits lower persistence than earnings performance attributable to the cash flow component of earnings, hence results also indicated that stock prices act as if investors “fixate” on earnings, failing to distinguish fully between the different properties of the accrual and cash flow components of earnings.Even if share price is often thought of and evaluated in terms of cash flows, earnings is also known to be extremely important to managers and analysts because of the key information it conveys about future prospects (Brigham and Ehrhardt, 2002).Various researchers examined value in terms of share return that Earnings reflect a stronger correlation with share return than does current operating cash flows (Watts, 1977; Dechow, 1994; Bartov et al, 1997) .These findings are robust across alternative cash-flow metrics (e.g., levels, per-share, and deflated by total assets) and are consistent with the viewpoint espoused by the FASB that cash-flow prediction is enhanced by consideration of earnings and accrual accounting data.Bowen, Burgstahler & Daley (1986) examined relationships between signals provided by accrual earnings and various measures of cash flow, Findings indicate that Correlations between traditional cash flow measures and alternative CF measures that incorporate more extensive adjustments are low, 2nd the correlations between alternative measures of CF and earnings are, while the correlations between traditional measures of CF and earnings are high.However, out-of-sample forecasts show that adding earnings rarely improves cash flow forecasts.Cash flow is a better short-term predictor of cash flow than are earnings, both in and out of sample, and the two are approximately equivalent long-term.Lorek & Willinger (1996) the time series properties and predictive abilities of cash flow data.Results indicate that this model clearly outperforms firm-specific and common-structure ARIMA models as well as a multivariate, cross-sectional regression model popularized in the literature.Disclaimer: This work has been submitted by a student.This is not an example of the work produced by our Essay Writing Service.