Real earnings management and the relevance of operating cash flows : A study of french listed firms

The primary focus of this study is to investigate whether the level of earnings management through real activities (REM)affects the value relevance of reported cash flows from operations (CFO), precisely with regard to their ability to predict futureCFOs. Using the data related to CAC all tradable listed French firms during 2008 through 2015, we provide evidence whichsupports the expected decrease in value relevance of reported CFO for future CFOs’ prediction in the presence of REM. Ourfinding highlights the fact that if managers decide to manipulate upward earnings through operating activities, they couldadversely affect the information content of CFOs. More precisely, an aggressive deviation from normal activities leads toabnormal levels of the main operating inflows and outflows in an inconsistent way and this deteriorates the value relevanceof cash flows from operations. This contribution is of use for creditors and investors and other key CFO users for predictionpurposes as it urges them to make necessary adjustments when predicting the future ability of an entity to generate cash flows