On The Decomposition Of Cash Flow Information To Predict The Value Of Empirical Research

Building on the developed DKW model of the accrual process andChinese specific economic environment, Wang Huacheng and his students'empirical tests revealed that cash-flow information was useful for investorsto predict future cash flows in Chinese capital market. The model assumesthat managers choose accounting policies to portray accurately the firm'seconomic situation. Although such assumptions could not be true all thetime, the model illustrates the cash-generating process of most companieswell by and large. Just as components of earnings could enhance thepredictive ability of aggregate earning, it is possible that components of cashflow could enhance the predictive ability of aggregate cash flow for futurecash flows. Thus, also based on the DKW model, the author further extendedit by decomposing operating cash flows into its components and discoveredthat disaggregated cash flows could enhance the predictive ability of theformer model. Moreover, because accruals inherently incorporateinformation about future cash flows, whereas past cash flow does not, itwould not be surprising to find that accruals enhance the predictive ability ofdisaggregated cash flow. As predicted, the regressive results also sustainedour predictions.