Corporate Life Cycle and the Value Relevance of Cash Flow Versus Accrual Financial Information

Motivated by recently renewed criticism of the current accrual accounting model we re-examine the extent to which cash flow and accrual accounting based measures are value relevant, and capable of explaining periodic changes in the firm's market value. Using the R square as a measure of explanatory power, we find that, in general, both cash flow and accrual accounting figures exhibit a low value-relevant level but, depending on the firm's life cycle, the explanatory power of accrual accounting exceeds that of cash flow measures. We also find that the firm's industry affiliation does not affect the cash flow/accrual accounting dominance relations per se. It affects, however, the magnitude of the gap between the R squares measures that pertain to the cash flow figures and those pertaining to their accrual accounting counterpart figures. Implications of our findings for researchers and the valuation of firm's value are also offered in the paper