Are Cash Earnings Disclosures Valuable?

Abstract

In this paper, we examine the relative information content of two cash earnings measures (earnings with amortization of intangibles added back and earnings before interest, taxes, depreciation, and amortization), one traditional accrual accounting earnings measure (earnings before extraordinary items), and one traditional cash flow measure (cash flow from operations). Our research is motivated by the increasing use of these cash earnings disclsoures and the perceived additional value they provide. Overall, we find results consistent with previous research that nothing beats accrual earnings in its ability to explain market-adjusted returns. In addition, and again consistent with prior literature, we find that as each measure moves further away from accrual accounting earnings and closer to cash flows, the explanatory power of the measure decreases. We do find, however, that the information content rank ordering of our four measures reverse when we perform our tests on only firms' loss-year observations, although there is no statistical significance between the measures in their relative information content. We further explore the loss-year sub-sample by examining cases in which the loss includes a large amortization charge. Within this sub-sample, the cash flow measures dominate. In fact, each of the two cash earnings measures provides significantly greater information content than does accounting earnings. The provides evidence that these disclosures may have value in certain settings.