Resumo:
Propsito do Trabalho:
This paper aims to analyze the impact of IFRS adoption on the predictive power of earnings components: cash flows and accruals. Specifically, we seek to analyze the relative predictive power for future earnings of these components for general firms and for firms with higher and lower relative amounts of accruals and then whether IFRS adoption has affected this power.Both cash flows and accounting accruals are believed to carry distinct information content that enable financial information users to assess firms? capacity to generate future earnings. Prediction of future earnings based on current financial information is one of the main objectives of the IASB?s conceptual framework. There are several studies analyzing the impact of IFRS for earning quality and their importance for market value relevance, generally finding positive results. Nevertheless, we believe that there is still a lack of researches assessing its influence of the information content of earnings components, specifically accruals and cash flows. Considering the improvement of information content of earnings that IFRS apparently brings, we propose the following hypothesis: IFRS adoption increases the relative information content and, consequently, the predictive power for future earnings of current earnings components (accruals and cash flows). Furthermore, considering that the information content about future earnings conveyed by accruals and cash flows is different, it is also possible to expect that the impact of IFRS adoption on these components is different. Besides, firms with a relative higher and lower amount of accruals may also present earnings components with different information contents that could also be differently affected by the IFRS adoption.
Base da plataforma terica:
Earnings are claimed to disclose not only present financial performance, but to carry information content that enables the prediction of future earnings. This prediction is based on the components of current earnings, which are more likely to persist in following periods (Sloan, 1996). According to Karampinis and Hevas (2009), the analysis of aggregated earnings is only part of the story, considering that earnings components have incremental information content, over and above that provided by earnings alone. Furthermore, traditional researches on financial statements analysis emphasize the role of accruals and cash flow components of current earnings in the assessment of future earnings. The fundamental argument states that these two components of ongoing profits are able to provide a relevant indication of firms? continuing ability to generate future returns (Wilson, 1986; Bowen et al, 1987; Sloan, 1996). Sloan (1996) demonstrate that it is important to analyze current earnings segregating it into accruals and cash flows, considering that the persistence of earnings performance depends on the relative magnitude of these components of earnings. Several studies analyzed the influence of each component of this segregation on earnings prediction, mainly in the past decades. Among those, we can cite Wilson (1986), Bowen et al, (1987), Sloan (1996) and Barth, Cram, and Nelson (2001). Those studies bring important knowledge about the importance of accruals and cash flows, showing that they convey information beyond earnings themselves (Wilson, 1986) and that cash flow and accruals bring distinct information content and, thus, have different implications (Sloan, 1996). The adoption of the IFRS, considered as a single set of high quality accounting standards, by almost all publicly listed companies in the European Union was expect to increase the quality and, consequently, the relevance of accounting amounts. As a consequence of these benefits, IFRS adoption may increase the information content about future earnings conveyed in current earnings components and thus, increase the predictive power of ongoing earnings components (cash flows and accruals). If managers use the increased reporting flexibility under IFRS to convey private information, earnings reported under IFRS may be more persistent and with greater information content (Atwood, Drake, Myers, & Myers, 2011). There are some studies that analyze the impact of IFRS adoption on the information content of earnings for future earnings predictions, but their evidences are mixed. While Karampinis and Hevas (2009) find that the adoption of IFRS positively affects the relevance of consolidated net income, similarly to Devalle, Onali and Magarini (2010) and Karğın (2013), Atwood et al (2011), for example, find that earnings reported under IFRS are no more closely associated with future earnings and future cash flows than earnings reported under domestic accounting standards of each country.
Mtodo de investigao:
Our sample comprises firm-level data from 10 countries from the European Union that mandatorily adopted IFRS in 2005. We use only these 10 countries in order to avoid confounding effects related to time and to incentives regarding voluntary adoption while evaluating the pre and post adoption period. In order to achieve the research?s objectives, we entertained several versions of a regression model with Current Earnings as the dependent variable and the three late years' Cash Flow from Operations (CFO) and Total Accruals as explanatory variables. The first versions comprises all companies throughout the whole period of the sample, from 2001 to 2013. We use to models, one establishing the general predictive power of the CFO from the three previous years for the current earnings and the other one establishing the predictive power of the lagged Accruals. As earnings, we first considered the line of Operating Income and then also entertain the models considering the line of Net Income. After first analyzing the general predictive power of each component, we asked whether this power is different for firms with higher and lower level of accruals. In order to obtain this answer, we ranked the firms, at each year, according to their level of accruals and separated the firms from the upper quartile (the 25% at the top of the rank) and from the lower quartile (the 25% at the bottom of the rank), creating a dummy variable indicating those firms, and entertain the models including an interaction with each of these dummy variables. Finally, we searched for evidences of any influence of IFRS adoption in the predictive power of these variables. In order to do so we add interaction with an IFRS indicator variable in the previous models.
Resultados, concluses e suas implicaes:
First, in the full period analysis, our results indicate that cash flows have the greater relative information content to predict future earnings, considering that the intensity of the effect of cash flows is much higher than the one of the accruals, once the coefficients and the adjusted R-squared are higher. Furthermore, our results also show that cash flows have a longer memory than accruals. While current earnings are explained by all three lags of cash flows, for accruals only the first two lags are statistical significant. These finds are in line with previous researches demonstrating that accruals may carry greater portions of noncurrent results, which are less likely to recur in future periods. Consequently, earnings attributable to accruals exhibits lower persistence than earnings performance attributable to cash flows (Sloan, 1996). Another interesting finding is that cash flows are highly sensitive to the accruals ranking (Upper and Lower quartiles), while the accruals themselves are not that sensitive.. Therefore, the amount of accruals of a firm seems to affect the information content of the cash flows while it seems not to change much of the accruals?. Subsequently, our results indicate that IFRS adoption increases the information content and, thus, the predictive power of both components of current earnings. Our findings support the hypothesis proposed in this research and, thus, support the view that IFRS adoption, as a principle-based standards set, provides accounting amounts with higher quality, that better reflect firms? position and performance and, consequently, increases the information content about future earnings carried by both the current earnings components. Although some may argue that IFRS, as a high quality reporting system, may have diminished the inherent uncertainty in accruals measures, we find that after IFRS adoption, the predictive power of cash flows is still higher than accruals?. Furthermore, it is also important to highlight that the intensity of cash flow for firms in the Upper Quartile of accruals is much higher after the IFRS adoption, suggesting that there is a way by which accruals affect the predictive power of cash flows and that IFRS plays an important role in this process. Future research could bring more elucidative information about this issue. Our results are important because they indicate that IFRS adoption increases the information content and, thus, the predictive power of both earnings components (accruals and cash flows). Despite the fact that the intensity of cash flow is higher than accruals?, our results also demonstrate that accruals carry informational content about future earnings and their amount seems to be associated with the predictive power of cash flows, and this association is significantly affected by IFRS, being, therefore, an important figure to be used by analysts to predict future earnings.
Referncias bibliogrficas:
Atwood, T. J., Drake, M. S., Myers, J. N., & Myers, L. A. (2011). Do earnings reported under IFRS tell us more about future earnings and cash flows? Journal of Accounting and Public Policy, 30(2), 103-121.
Barth, M. E., Cram, D. P., & Nelson, K. K. (2001). Accruals and the prediction of future cash flows. The Accounting Review, 76(1), 27-58.
Bowen, R. M., Burgstahler, D., & Daley, L. A. (1987). The incremental information content of accrual versus cash flows. Accounting Review, 723-747.
Devalle, A., Onali, E., & Magarini, R. (2010). Assessing the value relevance of accounting data after the introduction of IFRS in Europe. Journal of International Financial Management & Accounting, 21(2), 85-119.
Karampinis, N. I., & Hevas, D. L. (2009). The effect of the mandatory application of IFRS on the value relevance of accounting data: Some evidence from Greece. European Research Studies, 12(1), 73-100.
Karğın, S. (2013). The impact of IFRS on the value relevance of accounting information: Evidence from Turkish firms. International Journal of Economics and Finance, 5(4), 71.
Sloan, R. G. (1996). Do stock prices fully reflect information in accruals and cash flows about future earnings? Accounting Review, 289-315.
Wilson, G. P. (1986). The relative information content of accruals and cash flows: Combined evidence at the earnings announcement and annual report release date. Journal of Accounting Research, 165-200.
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