The role of earnings and its components in predicting future cash flows: Evidence from the MENA region firms

Hamza, Heba

Abstract

This thesis aims to examine the role of current earnings and its components - cash flows and accruals- in predicting the one-year-ahead cash flows from operations (CFO) in the MENA region country firms for the sample period 2005 to 2018. In order to achieve this aim, this thesis compares between a variety of cash flow prediction models to identify which model provides superior prediction of the one-year-ahead CFO. This thesis starts with aggregated predictors (i.e., earnings and CFO) to identify which of these aggregate predictors provide superior prediction of the one-year-ahead CFO. Then, this thesis examines whether the disaggregation of earnings, CFO and accruals to their major components enhances their ability to predict the one-year-ahead CFO. To evaluate predictive ability, both in-sample regression analysis and out-of-sample prediction tests are employed. The results of the in-sample regression analysis indicate that there is no significant difference between the ability of aggregate earnings and CFO to predict the one-year-ahead CFO, especially under the pooled regression analysis. However, the in-sample regression results show that the full disaggregation model that includes both the cash flow components and accrual components provides the best prediction of the one-year-ahead CFO. In contrast, the results of the out-of-sample prediction tests show that disaggregated predictors are unable to outperform the aggregate predictors in predicting the one-year-ahead CFO. Since out-of-sample prediction test is more reliable than in-sample regression, the results imply that disaggregation does not provide superior prediction of the one-year-ahead CFO in the MENA region. Further, this thesis investigates the impact of earnings management (discretionary accruals and real activities manipulation), unintentional managerial errors in estimating accruals and accounting conservatism on the predictive ability of earnings and its components. The findings show that there is a significant negative relationship between the predictive ability of earnings (and its components) and both earnings management and unintentional managerial errors. The results also show that although there is a weak positive significant relationship between the predictive ability of accruals and unconditional conservatism, there is no relationship between the predictive ability of earnings and both types of conservatism (conditional and unconditional conservatism).

Citation

Hamza, H. The role of earnings and its components in predicting future cash flows: Evidence from the MENA region firms. (Thesis). University of the West of England. Retrieved from https://uwe-repository.worktribe.com/output/6729173

• Thesis Type: Thesis
• Deposit Date: Sep 28, 2020
• Publicly Available Date: Apr 19, 2021
• Public URL: https://uwe-repository.worktribe.com/output/6729173
• Award Date: Apr 19, 2021