COMMERCE 4AF3 Lecture Notes - Lecture 6: Cash Flow, Stock Market, Earnings Management
14 Mar 2019
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Document Summary
Sloan wrote paper do stock prices full reflect information in accruals and cash flows about future earnings . Current earnings has 2 components: cash flows +/- accruals. We know current earnings performance will persist into future (i. e. cash flow from operations this year will be similar to next year). However, accruals reverse in next period and will not persist permanently. Most people look at eps when making decisions about buying/selling stocks. It"s possible that negative eps is a result of accruals, but most people don"t think of that. Investors fixate on earnings and don"t analyze the cash flow/accrual components until it has an impact on future earnings. This means stock price results are inconstant with traditional efficient market"s view (i. e. that stock price fully reflects publicly available information) doesn"t mean investors aren"t smart, just that there"s acquisition and processing costs that aren"t worth spending. Net income= cash flow from operations +/- accruals.
