Empirical Study On Public Company Accounting Earnings And Cash Flow Value Relevance

Decision-usefulness view determines the important part accounting informationplaying in capital market study area. Accounting information can be divided into twoparts: accounting earnings and cash flow. Accounting earnings is a kind of accountinginformation based on accrual basis, while cash flow is based on cash basis. The valuerelevance research of accounting information becomes the focus of empirical study;therefore, numbers of researches have been done by domestic and foreign scholars.The early research mainly concentrates on value relevance of accounting earningswhich is based on accrual basis. With the development of capital market and furtherstudy, the innate limitation of accrual basis is revealed.To the measurement with thesame accounting elements, different accounting policies can be selected by anenterprise to affect the results of measurement in order to maximize their own interest,that is to say, it is possible for accounting earnings based on accrual basis to bemanipulated. In the mid-20th century，theory and practice circle abroad began to payattention to the relevance of cash flow based on cash basis and stock price which isnot easy to be manipulated. In1998, Chinese government asked to make publicstatement of cash flow which indicated cash flow began to be paid attention by China.There is not a consistent conclusion on accounting earnings, cash flow valuerelevance at home and abroad. So my essay regards the value relevance of accountingearnings, cash flow as a research topic.My essay applies two ways combining theoretical analysis and empiricalstudy.My essay summarizes the predecessors’ research methods and their conclusionsby reading a large number of related literatures at home and abroad. My essay thinks that the efficient market theory and the capital asset pricing theory providestheoretical foundation for the study on the value relevance between accountingearnings, cash flows and t the stock price. The information view and the measurementview provide the mechanism of accounting information. They also describe therelationship between accounting earnings、cash flow and stock price. We canConclude from my study thatTherefore, my essay selects listed companies in A stock market of Shanghai andShenzhen from2010to2012as samples and makes an empirical study of the valuerelevance between China’s accounting earnings and cash flows using revised F-Omodel. In the end, some conclusions are reached.Firstly, there is positive relevance between accounting earnings and stock price;secondly, the value relevance of permanent earnings is higher than that of transitoryearnings; thirdly, positive relevance exists between cash flow and stock price; fourthly,there is incremental value relevance in accounting earnings and cash flow.Chinese capital market has gained rapid development during the past decades,but it is not perfect yet. Because of the different system, policy, economicenvironment and operating mechanism of China’s capital market between China andother countries, my essay can tell us that whether the foreign research results suitChina and provide empirical evidence for making relevant policy, instructinginvestors to invest rationally and acquiring relevant accounting informationefficiently and precisely.