INFORMATION ASYMMETRIES AND THE VALUE-RELEVANCE OF CASH FLOW AND ACCOUNTING FIGURES – EMPIRICAL ANALYSIS AND IMPLICATIONS FOR MANAGERIAL ACCOUNTING

While some of the modern performance measures used in managerial accounting rely on cash flow based figuresothers try to take advantage of the information content of accounting figures. However, whether the additionalinformation content in the accrual components of earnings improves the internal performance measurement is anopen empirical question. To shed light on this question, I examine the correlation between operating cash flowsand earnings with firm’s total shareholder returns. Using fixed firm effects regression methods for a large sampleof German listed firms covering some 5,000 firm years, the analysis shows that generally operating cash flow andearnings are both positively correlated with total shareholder return. However, with increasing informationasymmetry earnings become less correlated with the firm’s stock market performance and operating cash flowsdominate earnings in explaining total shareholder return (and vice versa). These results suggest that, the informationcontent of accounting figures is only relevant in settings characterized by low information asymmetriesand, thus, there is no one-size-fits-all performance measure for managerial accounting purposes.