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An empirical study of determinants of cash flow response coefficients
Abstract
Collins and Kothari's (1989) discounted dividend valuation model is used as a basis for the study of cross-sectional and intertemporal determinants of cash flow response coefficients in the association of cash flows with stock returns. In analyzing cash flow response coefficient determinants, net income and the accounting rate of return are used as benchmarks for comparison with three cash flow earnings measures, cash flow from operations, cash recoveries, and the cash recovery rate. Results indicate that economic growth is a cross-sectional determinant and the risk-free interest rate is an intertemporal determinant with net income as the earnings measure and to a lesser degree with cash flow from operations and cash recoveries as earnings measures. Tests for systematic risk and persistence as response coefficient determinants do not produce results consistent with the predicted signs with cash flow earnings measures nor with Collins and Kothari's previous results using net income as the earnings measure. Explanatory power is increased considerably when response coefficient determinant variables are added to the basic earnings/returns model for both net income and the two cash flow measures of cash from operations and cash recoveries. Test results for response coefficient determinant variables with the accounting rate of return and the cash recovery rate as earnings measures are very weak in comparison to net income, cash flow from operations, and cash recoveries as earnings measures. Based on cash recovery rate theory, growth in investments and inflation are possible additional cash flow response coefficient determinant variables. However, test results do not lend support to these variables as cash flow response coefficient determinants.
Subject Area
Accounting|Finance
Recommended Citation
Wick, Madalyn Helen, "An empirical study of determinants of cash flow response coefficients" (1993). ETD collection for University of Nebraska-Lincoln. AAI9333988.
https://digitalcommons.unl.edu/dissertations/AAI9333988