ADDITIONAL EVIDENCE ON THE INCREMENTAL INFORMATION-CONTENT OF CASH FLOWS AND ACCRUALS - THE IMPACT OF ERRORS IN MEASURING MARKET EXPECTATIONS

This study evaluates the relation between security returns and funds-b ased earnings components. We document that proxies for market expectat ions of the components that are based on measures of historical serial -and cross-dependencies are substantially more accurate than random-wa lk proxies. Moreover, we detect significantly higher valuations of the operating cash flow component of earnings, relative to current accrua ls, when market expectations are represented using the dependency-base d predictions. Such differential valuation is not detectable for rando m-walk representations. Contrary to results in Ali (1994), we find inc remental information in unexpected cash flows over the whole spectrum (moderate and extreme) of unexpected cash flow realizations.