Analytical Review of the Ability of Accrual and Cash Flow Components of Earnings to Forecast Future Abnormal Earnings and Equity Values

This Paper investigates the link between accrual and cash flow components of earnings and future abnormal earnings and Equity Values. The base of tests in This paper is Ohlson (1999) model and net income, equity book value and return on equity book value, is the variables that used in this paper. The statistical population of this research is the firms accepted in the Tehran stock exchange that examined for the time period between 2000 & 2009 by 132 firms as the sample.The results of empirical tests indicate that as predicted, accruals are incrementally informative regarding future abnormal earnings. Moreover, cash flows are significantly incrementally informative regarding future abnormal earnings. The results also reveal that the findings relating to accruals and cash flows in the abnormal earnings equations are “mirror images” of each other. The results also indicate that the accrual and cash flow components of earnings are incrementally valuation relevant.