Do capital markets value earnings and cash flows alike? International empirical evidence

In this study we examine empirically the value relevance of earnings and cash flows in three major capital markets, two Anglo-Saxon, the UK and the USA and one code law country, France. Our dataset consists of more than 41,000 USA, UK and French firm-year observations over a nine year period. Multivariate statistical regression analysis is undertaken to test the major research hypotheses. Results show that the value relevance of earnings and cash flows is country specific. Specifically, results indicate that earnings are valued more in France and less in the Anglo-Saxon countries, due to the fact that the financial reporting in the Anglo- Saxon countries is less conservative and managers may manipulate easier financial information. Moreover, as hypothesized, results show that cash flows are the most (least) value relevant in the USA and the UK (France). In summary, results support that there are substantial differences in the way investors and financial analysts perceive earnings and cash flows in the UK, France and the USA. The results of this study should be of great importance to the major stakeholders such as investors, creditors, financial analysts, especially after the recent global financial crisis and the latest collapses of colossal organizations worldwide.