Value relevance of earnings and cash flows during the global financial crisis

Purpose: This study examines the incremental value relevance of cash flow from operations (CFO) given book value and earnings. It also examines the relative value relevance of earnings and CFO and changes therein between the 2008-2009 global financial crisis (GFC) and the pre-crisis period (PCP). Research design: Least square regressions are estimated using modified Ohlson (1995) model to examine the research questions. Relative and incremental value relevance is examined by adjusted R-square and Vuong Z statistics. Findings: The findings suggest that CFO has value relevance incremental to book value and earnings. The findings also suggest that earnings has greater relative and incremental information content than that of CFO in the Australian market. The value relevance of earnings has increased and that of CFO has decreased during the GFC compared to the PCP. Implications: This study contributes to the debate on the value relevance of CFO incremental to book value and earnings. It also extends the literature showing that earnings has information content (value relevance) superior to CFO in the Australian market even during an economy-wide exogenous shock like the 2008-2009 GFC. Originality/value: This is the first known study examining the value relevance of fundamental accounting information such as earnings and CFO in the context of the 2008 -2009 GFC. It extends prior research in East Asian countries in the context of the 1997 Asian financial crisis and provides evidence on the impact of a world-wide exogenous shock on the value relevance of earnings and CFO from a relatively mature and developed country with different legal, institutional and enforcement backgrounds. Limitation: This study focuses on a single country. Future studies can conduct cross-country examination of the impact of the GFC on the value relevance of earnings and CFO.