The Relevance of Earnings and Cash Flows Measures in Explaining Security Returns over Long Intervals: Evidence from Sweden

Sammanfattning: This study intends to provide an increased understanding of the process connecting security returns, earnings and cash flows by focusing on the long return period effect on this return-earnings/cash flow association. The research is based on the Swedish data relating to the listed Swedish companies over 1998-2009. The study takes the statistical approach and invokes econometrical modelling to answer which accounting measures are the most relevant for explaining stock returns in Swedish companies over increasing time intervals. The reporting environment in Sweden indicates the usefulness of both accounting measures; however, the empirical research from other countries provides mixed evidence about value relevance of earnings and cash flows. The empirical results of this study find that earnings are relatively more informative than various cash flow measures in explaining stock returns over both short and long measurement intervals. However, cash flow measures provide incremental information content beyond earnings throughout long and short measurement intervals. This especially holds when investigating disaggregated cash flows. These findings confirm that the two significant summary measures (earnings and cash flows) of company performance have value relevance and could be of interest to international investors attracted in investing in Swedish stocks.