Time-series properties and predictive ability of quarterly cash flows

Kenneth S Lorek, G. Lee Willinger

Research output: Contribution to journalArticle

7 Citations (Scopus)

Abstract

We provide descriptive and predictive evidence on the time-series properties and predictive ability of quarterly cash flows from operations (CFO) reported in accordance with Statement of Financial Accounting Standards (SFAS) No. 95. Previous work such as Hopwood and McKeown [Hopwood, W.S., & McKeown, J.C., (1992). Empirical evidence on the time-series properties of operating cash flows. Managerial Finance, 18, 62-78] and Lorek, Schaefer and Willinger [Lorek, K.S., Schaefer, T.F., & Willinger, G.L., (1993, January). Time-series properties and predictive ability of funds flow variables." The Accounting Review, 68, 151-63], among others, has analyzed a proxy series (PCFO) for quarterly cash flows constructed via a relatively simplistic algorithm. We provide new evidence documenting that: (1) the time-series properties of quarterly CFO are at variance with the exclusively seasonal characterization of quarterly PCFO exhibiting both adjacent (quarter-to-quarter) and seasonal (quarter-by-quarter) relationships, (2) the Brown-Rozeff ARIMA model significantly outpredicts the random walk with drift model, seasonal random walk with drift model, and a disaggregated-accrual model, the multivariate time-series regression model (MULT) originally popularized by Lorek and Willinger [Lorek, K.S., & Willinger, G.L., (1996, January). A multivariate time-series prediction model for cash-flow data. The Accounting Review, 71, 81-101], (3) the forecast errors of larger firms are significantly smaller than the forecast errors of smaller firms, and (4) the predictive ability of the Brown-Rozeff model is robust when tested upon an expanded sample of firms (n = 745; 8940 firms/quarter predictions) obtained by eliminating the considerable data requirements of MULT.

Original languageEnglish (US)
Pages (from-to)65-71
Number of pages7
JournalAdvances in Accounting
Volume24
Issue number1
DOIs
StatePublished - Jun 2008

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Cash flow
Predictive ability
Random walk
Forecast error
Multivariate time series
Small firms
Regression model
Large firms
Financial accounting standards
Flow of funds
Finance
ARIMA models
Empirical evidence
Operating cash flows
Prediction
Prediction model

ASJC Scopus subject areas

  • Accounting

Cite this

Time-series properties and predictive ability of quarterly cash flows. / Lorek, Kenneth S; Willinger, G. Lee.

In: Advances in Accounting, Vol. 24, No. 1, 06.2008, p. 65-71.

Research output: Contribution to journalArticle

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