Do Stock Prices Fully Reflect Information in Accruals and Cash Flows About Future Earnings

Abstract

This paper investigates whether stock prices reflect information about future earnings contained in the accrual and cash flow components of current earnings. The extent to which current earnings performance persists into the future is shown to depend on the relative magnitudes of the cash and accrual components of current earnings. However, stock prices are found to act as if investors fixate on earnings, failing to fully reflect information in the accrual and cash flow components of current earnings until it impacts future earnings.