The Associations of Cash Flows and Earnings with Firm Performance: An International Comparison

This paper investigates the difference in the ability of between earnings and cash flows to measure firm performance across the two types of countries (code law countries and common law countries) exists. There are three predictions about this issue: (i) Over short measurement intervals, the ability of earnings relative to cash flows to reflect firm performance is stronger form firms in code law countries, compared to firms in common law countries. (ii) While earnings will improve more relative to cash flows for firms in code law countries over longer intervals, earnings will improve less relative to cash flows for firms in common law countries. (iii) Earnings and cash flows as correlated in stock returns varied with the level of aggregate accruals in the United States, are similarly correlated in the six countries as well. The results of empirical tests are consistent with there predictions