Is Earnings Information Superior to Net Income as a Measure of Future Earnings? A Study on Accruals and Real Earnings Management

Abstract

This study examines the incremental information content of components of earnings by regressing future net income of earnings’ components in a series of multivariate models. We find that the components of operating cash flow and accruals provide more information to effectively predict future profitability, particularly when we dismantles financial measurements into various combinations of operating cash flow and accrual-based components. However, the components of real earnings management provide less information of future profitability. We observe that the more informative the information content of earnings is, the more precise the prediction of future profitability can be.