The role of operating cash flow and accrual components of earnings in improving the predictive ability of earning

Abstract EN

The prediction of Cash flow is involved in a number of economic decisions, particularly in investment.

Previous research conducted in the United States has provided inconsistency in the results of investigating accounting data, cash flow and accrual accounting data in predicting future cash flows.

Few researches were detected addressing the prediction of cash flow in an Egyptian context.

This research aims to test the ability of accounting earnings versus cash flows and accruals to predict future cash flows for a sample listed firms in the Egyptian stock exchange.

To achieve this objective, a sample of 102 firms from 14 different sectors was collected from year 2012 to 2017 (585 observations after excluding outliers).

The empirical results show that past earnings, cash flows and accrual component of earnings can be used to predict future cash flows of Egyptian listed companies and cash flows have better predictive power than past earnings.

Additionally, the cash flow model and the cash flow and accrual components of earnings model have better predictive power than the earnings model.

The findings of testing the models in an out-of-sample period suggest that the cash flow model is a better predictor of future cash flows than the other models.