Literature Review On Financial Management

Literature Review On Financial Management-20
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).

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).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).

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This results in larger estimation errors for accruals and diminished earnings quality.

It gives an idea about how monthly sales announcements of major department and discount stores provide information for investors not only for the retail giants but also for their suppliers (Olsen and Dietrich (1985).

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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.An exception to this general result is that net income plus depreciation and amortization and working capital from operations appear to be the best predictors of cash flow from operations.Overall there results are not consistent with the FASB’s statements that earnings numbers provide better forecasts of future cash flows than do cash flow numbers.It was concluded that the study provides evidence in support of the FASB’s assertions that current earnings is a better predictor of future cash flows than is current cash flows. Rivara(1996) found out the accuracy and the consensus among forecasters of earnings estimates for U. (Ball and Watts (1972), Albrecht, Lookabill & Mc Keown (1977), Watts and Leftwich (1977) and Lev (1983) studied the Earnings ability to predict future earnings studied first or second order autocorrelations and or forecasts over one or two-year horizons and provided evidence to support a random walk model that is uncorrelated earnings changes, However, random walk may not be descriptive of the earnings process Where as Ramesh and Thiagarajan (1989) rejected a random walk earnings model and Lipe and Kormendi (1993) show that higher order, rather than random walk, models are descriptive of market-adjusted earnings’ time-series process.Finger (1994) found out the earnings ability to predict future earnings and future cash flow from operations1 one through eight years ahead using annual data from1935-87 for 50 firms.The sales volume announcements for the retailers furnish information on the future cash flow prospects for their suppliers and, thus, are incorporated into the suppliers’ share prices.Dharan (1987) examined the comparative abilities of accrual sales and cash collections of sales to predict future cash flows.It has been shown that earnings better predicts future operating cash flows than does current operating cash flows because accruals in earnings “offset the negative correlation in cash flow changes to produce earnings changes that are much less negatively serially correlated ( Dechow, et al 1998) that is why earnings, rather than current operating cash flows, tends to be used in firm share valuations.Earnings quality can be affected by sales volatility (Dechow and Dichev (2002) and Francis et al. By and large the greater the sales volatility, the more unstable is the operating environment.It is found that when cash realization occurs in a period subsequent to sales realization, cash flow forecasts from earnings based on accrual sales are better than cash flow forecasts from earnings based on cash collections.This is because of accrual sales “provides information on management’s expectations about future cash flows (Dharan, 1987). The accounting profession requires that firms disaggregate net income into specific components, even though earnings disaggregation is important for assessing firm profitability, there is little empirical evidence that the classification scheme actually improves profitability forecasts by analyzing the accuracy improvements in out-of-sample forecasts of one-year ahead return-on-equity (ROE) to examine the predictive content of earnings disaggregations (Fairfield, Sweeney, & Yohn) .

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