Cash Flow Part of Profitability as a Stock Return Predictor
April 17, 2015 - Fundamental Valuation
Is the part of profitability based on cash flow more informative than the part based on accruals? In their March 2015 paper entitled “Accruals, Cash Flows, and Operating Profitability in the Cross Section of Stock Returns”, Ray Ball, Joseph Gerakos, Juhani Linnainmaa and Valeri Nikolaev investigate the power of the cash flow part of profitability to predict stock returns. They compare its predictive power to those of overall operating profitability and of the accruals part of profitability. Using monthly returns and annual firm accounting data (lagged six months) for a broad sample of U.S. common stocks during July 1963 through December 2013, they find that: Keep Reading