Abstract:

One of the major objectives of financial reporting is to provide useful information to the capital market participants for investing, credit and managerial decisions. Empirical capital markets research examined extensively the type of financial information that could be useful in explaining security returns. The evaluation of earnings usefulness in the capital markets has been among the primary empirical questions raised in several studies in the past three decades.
Using more than 40,000 firm year observations from Anglo Saxon and code law countries, we examine empirically the role of earnings and cash flows in explaining security returns. Results support our hypotheses that capital markets value earnings and cash flows differently in Anglo Saxon countries than in Code Law countries. Results show that both earnings and cash flows are valued in the marketplace but their valuation is country specific. Specifically, results show that earnings are valued more in Code Law countries and less in the Anglo-Saxon countries, due to the fact that the financial reporting in the Anglo-Saxon countries is much more conservative and managers may manipulate easier financial information. On the other hand, as hypothesized, results show that cash flows are the most value relevant in Anglo Saxon countries and the least value relevant in Code Law countries. In addition results show that the longer the return window the greater the value relevance of earnings and cash flows.

Keywords:

Cashflows, earnings.