WHICH IS MORE VALUE RELEVANT: EARNINGS OR CASH FLOWS?

A LIFE CYCLE EXAMINATION

Ervin L. Blac
Department of Accounting
University of Arkansas
Fayetteville, AR 72701
Telephone !"01# "7"$%11&
Fa' (um)er !"01# "7"$7%&7
e)lack*comp+uark+e,u
Ma! "##$
-This paper )enefite, from fun,ing )y the .o' Fello/ship an, the University of 0ashington Accounting
Development Fun,+ 1 am grateful for comments on earlier ,rafts of the paper from ,issertation committee mem)ers
2ary .+ 3i,,le, Terry 4+ 5hevlin, 6,/ar, Rice an, 5usan 3+ 7oyer8 seminar participants at the University of
Arkansas, 7ichigan 5tate University, University of 0yoming an, Te'as .hristian University8 an, from 9elen
A,ams, Ro)ert 3o/en, Davi, 3urgstahler, :evin 9arper, Alister 9unt, ;auren :elly, :aren <incus, D+ 5hores, an,
:enton 0alker+
1
WHICH IS MORE VALUE RELEVANT: EARNINGS OR CASH FLOWS?
A LIFE CYCLE EXAMINATION
ABSTRACT: 5tatements in the financial press an, recent research suggest that controversy
e'ists as to /hich accounting measure is more value$relevant earnings or cash flo/s+ This stu,y
e'amines the relative value$relevance of earnings an, cash flo/ measures in ,ifferent life$cycle
stages+ 6arnings are pre,icte, to )e more value$relevant in mature stages+ .ash flo/s are
e'pecte, to )e more value relevant in stages characteri=e, )y gro/th an,>or uncertainty+ 1n
general the hypotheses are supporte, using 0al, X
2
tests !3i,,le, 5eo/, an, 5iegel 1??"# of a
mo,el )ase, on the theoretical /ork of Feltham an, @hson !1??"#+ 6vi,ence supports the
hypothesis that earnings are more value$relevant than operating, investing, or financing cash
flo/s in mature life$cycle stages+ 9o/ever, in the start$up stage investing cash flo/s are more
value relevant than earnings+ 1n gro/th an, ,ecline stages, operating cash flo/s are more value
relevant than earnings+
2
WHICH IS MORE VALUE RELEVANT: EARNINGS OR CASH FLOWS?
A LIFE CYCLE EXAMINATION
Accor,ing to U+ 5+ financial accounting stan,ar,s an, prior research, accrual$)ase,
earnings provi,e a )etter measure of firm performance than cash flo/ information+ FA53
5tatement of .oncepts (o+1, paragraph AA, states Binformation a)out enterprise earnings an, its
components measure, )y accrual accounting generally provi,es a )etter in,ication of enterprise
performance than ,oes information a)out current cash receipts an, payments+B Results from
prior capital markets research imply that earnings are more value$relevant than operating cash
flo/s !Decho/ 1??A8 3i,,le, 5eo/, an, 5iegel 1??"8 Ray)urn 1?&%8 5loan 1??%#+
9o/ever, an alternative vie/ of accrual accounting is often e'presse, in the )usiness
press as illustrate, in the Institutional Investor !August 1?&&, p+ ""#, Ba gro/ing num)er of
portfolio managers an, analysts insist that cash flo/s is a more meaningful measure of a
companyCs value than reporte, earnings+B Institutional Investor !1??A# reports that %1+& percent
of chief financial officers make ma'imi=ing cash flo/ a top priority compare, /ith "A percent in
a prior stu,y+
1
Also, even though 3i,,le, 5eo/, an, 5iegel !1??"# fin, that in the maDority of
in,ustries earnings is more value relevant than operating cash flo/s, in some in,ustries operating
cash flo/s is more value$relevant than earnings+ Thus, there continues to )e controversy as to
/hich is more value relevant earnings or cash flo/ measures+
<rior research has not e'amine, the effects of the corporate life cycle on the relative
value$relevance of accounting performance measures+ 3ernar, !1?&?# o)serves that, Ethe
primary ,eficiency of the e'isting FvaluationG literature is that too little thought has )een given to
H
/hat economic message coul, )e conveye, )y a given ,isclosure, an, ho/ that message may
vary across situations+I 9e also implies that a firmJs life$cycle stage coul, affect the value$
relevance of accounting ,isclosures /hen he states that Eit /oul, )e interesting to stu,y ho/
fun,amental analysis for ne/ firms ,iffers from that for esta)lishe, firms+I The 1nstitute of
7anagerial Accountants !1?&%, p+ 1H# says that, Eat each stage+++in an entityCs life$cycle, ,ifferent
measures of financial performance take on varying ,egrees of importance+ Therefore, neither
gro/th nor net income nor cash flo/s nor return on investment Ffor e'ampleG shoul, )e
emphasi=e, to the e'clusion of other meaningful measures+I
This paper a,,resses ,eficiencies of prior valuation>information content stu,ies )y
a,,ressing the Kuestion of /hether earnings is more value relevant than cash flo/ measures in
all firm life$cycle stages+ The firm life cycle offers a key setting for analysis of the relative
value$relevance of earnings an, cash flo/ measures+ The life$cycle concept captures a common
set of financial characteristics for firms in a life$cycle stage an, is use, freKuently in aca,emic
research an, the financial press+ 3ecause a num)er of financial characteristics ,iffer )y life$
cycle stage, it follo/s that the relative value$relevance of accounting measures may not )e the
same in each life$cycle stage+ For e'ample, cash flo/s may )e more value$relevant than
earnings for firms in ,ecline+ CA Magazine, !1??H# p+ 1&$1?, states that Ecash flo/ is a )etter
measure of a companyJs recovery follo/ing a recession than are )ook profits+I Also, one of the
main reasons cite, for )usiness failures, especially for small start$up>emerging gro/th
companies, is poor cash management, not lack of profits !Small Business Reports 1??1#+
9ypotheses are ,evelope, /hich pre,ict the relative value$relevance of the cash flo/
measures an, earnings for firms in ,ifferent life$cycle stages+ These relationships are )ase, on a
A
mo,el of the components of firm value !7yers 1?77#+ Financial characteristics associate, /ith
corporate life$cycle stages are use, to classify firm$years into life$cycle stages+ The relative
value$relevance of earnings an, three cash flo/ measures are teste, cross$sectionally in life$
cycle stage using metho,s ,evelope, in 3i,,le, 5eo/ an, 5iegel !1??"#+ Data are collecte,
from various sources, inclu,ing the Compustat Annual 1n,ustrial an, the Annual Research ,ata
sources.
As hypothesi=e, earnings e'hi)it the strongest value$relevance for firms in mature stages+
1n the early an, later life$cycle stages, a cash flo/ measure !investing cash flo/s in the startup
an, operating cash flo/s in the gro/th an, ,ecline stages# is more value$relevant than earnings+
The results imply that for mature firms, earnings is a )etter summary measure than cash flo/s+
3ut, in other life$cycle stages cash flo/ measures are )etter summary measures for valuation+
R%la&%' R%(%arc) *n Li+%,C!cl% T)%*r! an' Val-%,R%l%vanc%
.orporate life$cycle theory is an e'tension of the pro,uct life$cycle concept ,evelope, in
marketing an, microeconomics !Rink an, 5/an 1?7? an, 7ueller 1?72#+ 1n,ivi,ual pro,ucts
!goo,s or services# move through four more or less i,entifia)le phases start$up, gro/th, mature,
an, ,ecline+ 5imilarly, firms can )e ,escri)e, as having life$cycle stages that ,epen, on their
portfolios of pro,ucts+ 7o,els of the firm life cycle presuppose that there are regularities in
corporate ,evelopment an, that these regularities occur in such a /ay that the corporationsC
,evelopmental processes len, themselves to segmentation into stages or perio,s of time !5mith,
7itchell, an, 5ummer 1?&"#+
;ife$cycle stages are freKuently use, in the financial press an, in investment research to
,escri)e firms+ Secured Lender (!!"#, $et%or& 'orld (!!"#, (ournal o) Management (!!"#,
"
and (ournal o) Business *enturing (!!"# provi,e evi,ence that )usinesses, investors,
aca,emics, an, len,ers use the life$cycle concept in their evaluations of firms+ For e'ample, the
Secured Lender !1??A, page H&# states that, Ean a/areness of the clientJs specific gro/th stage
an, an un,erstan,ing of /here the firm has )een an, ho/ it got there /ill help Flen,ing
institutionsG )etter evaluate the firmJs financial information, current an, future nee,s, an,
management capa)ilities+I Also, various mutual fun, companies have emerging gro/th or
gro/th fun,s compose, of firms that are primarily in the gro/th stage of the life$cycle+
<rior research has not e'amine, the effects of the corporate life cycle on the relative
value$relevance of accounting performance measures+ 9o/ever, recent stu,ies that e'amine,
the relative value$relevance of earnings an, operating cash flo/s contain results that might )e
clarifie, )y consi,ering the corporate life cycle+ For e'ample, Decho/ !1??A# provi,es evi,ence
that earnings are more value$relevant than operating cash flo/s E!1# the shorter the performance
measurement interval, !2# the greater the volatility of the firmJs /orking capital reKuirements
an, investment an, financing activities, an, !H# the longer the firmJs operating cycle+I 9er
hypotheses are primarily )ase, on the premise that cash flo/s are pre,icte, to )e more ar)itrary
an, suffer more severely from timing an, matching pro)lems than earnings+ This may )e true
for firms that are in the mature stage, )ut for firms that are in start$up, gro/th or ,ecline,
earnings also suffer from these pro)lems+
As another e'ample, 3i,,le, 5eo/, an, 5iegel !1??"# e'amine the relative value$
relevance of earnings, operating cash flo/s !.F@#, an, sales in ,ifferent in,ustries+ They
provi,e evi,ence that for most in,ustries earnings are most value$relevant, )ut for some
in,ustries .F@ is most value$relevant+ 0hile they ,i, not attempt to control for in,ustry life$
%
cycle, these results coul, )e affecte, )y the life$cycle stage of firms in a particular in,ustry+ As
pre,icte, )y the hypotheses, cash flo/ measures of firms in in,ustries /ith the maDority of firms
in start$up, gro/th, or ,ecline stages may )e e'pecte, to )e more value$relevant than earnings+
7oreover, there is some evi,ence of a life$cycle effect relate, to accounting measures
other than earnings an, cash flo/ measures+ Anthony an, Ramesh !1??2# sho/ that stock
market response to une'pecte, sales gro/th an, une'pecte, capital investment is a function of
firm life$cycle stage, even after controlling for firm si=e, risk, an, measurement error in the
pro'ies of the performance measures+ 3lack !1??&# fin,s evi,ence of life$cycle impacts on the
incremental information content of earnings an, cash flo/ measures+ 5elling an, 5tickney
!1?&?#, in an e'amination of )usiness environment effects on a firmCs return on assets, fin,
evi,ence that in,ustry characteristics, inclu,ing in,ustry life$cycle, are useful in un,erstan,ing
return on assets !R@A# over time an, across firms+ For e'ample, in,ustries /ith the highest
R@As are all mature, /hereas, in,ustries /ith the lo/est R@As are either in the ,ecline phase or
highly cyclical+
This stu,y com)ines these life cycle an, value$relevance research streams to e'amine the
effect of the corporate life cycle on the value$relevance of accrual$)ase, earnings an, the three
summary cash flo/ measures !FA5 ?"#+ 1n the ne't section hypotheses are ,evelope, /hich
pre,ict ,ifferent relative value$relevance relationships for earnings an, cash flo/ measures in
,ifferent life$cycle stages+
Li+% C!cl% E++%c&( *n &)% R%la&iv% Val-%,R%l%vanc% *+ Acc*-n&in. M%a(-r%(
Li)e C+cle ,))ects
.onsi,er the characteri=ation of firm value provi,e, )y 7yers !1?77#
7
Value of Firm = Value of Assets in Place + Value of Growth Opportunities (1) The
relative value of assets in place compare, to the value of gro/th opportunities changes as a firm
procee,s through its life$cycle+ For e'ample, start$up firm value is largely a function of the
value of gro/th opportunities, /hereas a mature firm has relatively fe/er gro/th opportunities
an, its value is largely attri)uta)le to the value of assets in place+
7yersJ characteri=ation of firm value is closely relate, to a valuation mo,el !use, )y
3urgstahler an, Dichev 1??7 an, 3arth, 3eaver an, ;an,sman 1??%# /hich e'presses, in
general form, market value of eKuity, M*,, for firm i in year t, as a linear function of recogni=e,
net assets !assets in place# L measure, )y )ook value of eKuity $ B*,, an, unrecogni=e, net
assets !gro/th opportunities#, -$A
MVE
it
= a
1
BVE
it
+ a

!"A
it
/01
1f )ook values of recogni=e, assets eKual their fair values an, fair values are /ell$,efine, as in a
setting economically eKuivalent to perfect an, complete markets, -$A eKuals the present value
of incremental cash flo/s of unrecogni=e, net assets !gro/th opportunities#, an, a

an, a
2
each
eKual one+ 1f )ook values ,o not eKual their fair values, then -$A also inclu,es the ,ifference
)et/een fair an, )ook values of recogni=e, net assets8 i+e+, it /oul, inclu,e the value of the
gro/th opportunities an, the ,ifference )et/een fair an, )ook values of assets+ 1n the more
realistic setting of imperfect an, incomplete markets, -$A reflects the ,ifference )et/een
assetsJ values$in$use over entry or e'it values, an, a

an, a
2
nee, not eKual one+
3ecause revenues an, e'penses relating to unrecogni=e, net assets, inclu,ing any e'cess
of values$in$use over entry or e'it values, can )e reflecte, in net income !(1#, net income is a
pro'y for -$A !see 3ernar, 1??A8 3arth an, ;an,sman 1??", an, @hlson 1??"#+ Depen,ing on
&
a firmJs life$cycle stage other potential pro'ies of a firmJs unrecogni=e, net assets are the three
summary cash flo/ measures operating cash flo/s !.F@#, investing cash flo/s !.F1#, an,
financing cash flo/s !.FF#+
The value$relevant information provi,e, )y a given accounting measure can )e
envisione, in a Menn ,iagram+ Relative value$relevance tests compare the si=e of the circles to
,etermine /hich is the largest+
2
To empirically implement eKuation !2#, the follo/ing
estimating eKuation is use,
MVE
it
= a
#
+ a

BVE
it
+ a

!"A
it
+ e
it
$ /21
9ypotheses are teste, )y comparing the value$relevance, in each life$cycle stage, of four
,ifferent pro'ies of -$A (1, .F@, .F1, an, .F1+
1n his te't, 5tickney !1??%, p+ A%# sho/s the e'pecte, relation of income flo/s an, cash
flo/s from operations, investing, an, financing at various life$cycle stages+ 0hite, 5on,hi, an,
Frie, !1??7, pp+ 1&7$1&&# ,escri)e life$cycle effects on the firmJs financial performance an, the
e'pecte, pattern of ratios in ,ifferent life$cycle stages+
.+pot/esis 0evelopment1 Li)e2c+cle ,))ects on Relative *alue2Relevance
1n early firm life$cycle stages, gro/th opportunities are a relatively larger component of
firm value than assets in place+ Assets in place, in these early stages, are e'pecte, to provi,e less
value relevant information a)out firm value, )ecause they are a relatively smaller component of
firm value+ 1n the start$up an, early gro/th stages, )ook value of eKuity is e'pecte, to more
closely appro'imate the liKui,ation value of assets in place8 i+e+, current cost is not too remove,
from historical cost+ Thus, in these stages, the pro'y that provi,es more value$relevant
?
information a)out firm$value is the one that provi,es more information a)out the future gro/th
opportunities of the firm+
.heung, ;iu, an, 5chaefer !1??%# fin, that the value$relevance of earnings ,ecreases,
an, the value$relevance of operating cash flo/s increases, /ith a ,ecrease in the permanence of
earnings+ 1n start$up an, early gro/th stages, the revenue an, e'penses generate, )y a firmJs
assets in place are e'pecte, to )e more transitory than in later gro/th or mature stages, /hen
income is more pre,icta)le+ An e'ample of this can )e seen in the )iotechnology or electronics
in,ustry /hen assets in place, use, for ,evelopment of pro,ucts an, research early in the firm
life$cycle, generate fe/, if any, revenues, an, income is negative+ As these companies mature
the nature of the revenues an, e'penses change to inclu,e more pro,uction an, sales relate,
activities, /hich )ecome more pre,icta)le, an, permanent, as the firm matures+
7any firms fail ,uring the early life$cycle stages for reasons relate, to cash flo/s+ The
cash flo/ measures are e'pecte, to provi,e information a)out the via)ility of the firm $ /hether
the firm survives to reali=e its gro/th opportunities+ Financing cash flo/s provi,e value$
relevant information a)out the a)ility of the firm to o)tain financing to fun, gro/th an,
,evelopment+ 1nvesting cash flo/s provi,e value relevant information a)out investment in long$
term assets to ,evelop gro/th opportunities or unreali=e, net assets, -$A+ @perating cash flo/s
provi,e information a)out the firmJs a)ility to internally fun, gro/th+ Thus, the first hypothesis
is !in alternative form#
.1 0uring earl+ li)e2c+cle stages, cas/ )lo% measures are e3pected to 4e more value2
relevant t/an earnings.
10
As the firm matures, gro/th opportunities, although still a maDor component of firm
value, are relatively lo/er an, the relative value of assets in place increases+ Assets in place
generate revenues an, e'penses /hich are more representative of the value$in$use, than in more
early life$cycle stages+ Also, the revenues an, e'penses generate, )y the assets in place are
more value$relevant a)out the value of gro/th opportunities or -$A+ 7ore of the firmJs
unrecogni=e, net assets, or gro/th opportunities, are e'pecte, to )e similar to its assets in place
as firm e'pansion occurs in areas of )usiness similar to its current )usiness+ Also, the firmJs
a)ility to profita)ly take a,vantage of gro/th opportunities is )etter kno/n as the firm ,evelops
a track recor,+
1n these later gro/th an, mature stages, earnings are e'pecte, to )e less transitory an,
more permanent+ The clean surplus assumptions of the Feltham$@hlson !1??"# mo,el are more
likely to hol,8 thus, net income is also e'pecte, to )etter appro'imate -$A than in early or later
life$cycle stages+ Thus, in these stages, earnings are e'pecte, to provi,e more value$relevant
information than cash flo/ measures, /hich yiel,s the secon, hypothesis !in alternative form#
.21 0uring mature li)e2c+cle stages, earnings are e3pected to 4e more value2relevant
t/an cas/ )lo% measures.
1n later, ,eclining life$cycle stages the permanence of a firmJs earnings is e'pecte, to
,ecline as the change in earnings is e'pecte, to )e larger an, negative for ,eclining firms+
.heng, et+al+, fin, evi,ence that supports the increase, value$relevance of operating cash flo/s
relative to earnings as the permanence of earnings ,eclines+ 3arth, 3eaver, an, ;an,sman
!1??%# fin, that the value$relevance of net income is lo/er than )ook value of eKuity for firms
/ith poor financial health relative to other firms+ 5u)ramanyan an, 0il, !1??H# fin, that the
11
informativeness of earnings is inversely relate, to pro'ies for pro)a)ility of liKui,ation or
financial ,ifficulty+ Thus, evi,ence suggests that earningsJ a)ility to convey value$relevant
information a)out the firmJs unrecogni=e, assets an,>or the values$in$use over entry or e'it
values is lo/er /hen a firm is in ,ecline+
1n contrast, cash flo/ measures are e'pecte, to provi,e value relevant information a)out
the firmJs gro/th opportunities, or lack thereof+ @perating cash flo/s provi,e information a)out
the firmJs a)ility to continue to cover cash nee,s internally+ 1nvesting cash flo/s provi,e
information a)out the liKui,ation value of a firmJs e'isting assets an, a)out its capital
e'pen,itures+ Financing cash flo/s provi,e value$relevant information a)out the firmJs
financing activities, inclu,ing its a)ility to )orro/ or repay ,e)t an, raise eKuity capital+ Thus,
the thir, hypothesis, in alternative form, is
.51 0uring declining li)e2c+cle stages, cas/ )lo% measures are e3pected to 4e more
value2relevant t/an earnings.
R%(%arc) M%&)*'*l*.!
Li)e2c+cle stage classi)ication
This stu,y reports results )ase, on life$cycle classification metho,s ,evelope, )y Anthony an,
Ramesh !1??2#+ Anthony an, Ramesh classify firms using in,ivi,ual varia)les !,ivi,en,
payout, sales gro/th, an, firm age# an, then use a composite score o)taine, from all varia)les
for classification+ They assign firm$year o)servations into ;o/, 7e,ium, or 9igh categories for
each of the three classification varia)les+ Then, these rankings are assigne, a score !1, 2, or H#+
For each firm$year o)servation scores are then a,,e, to form a composite score an, the
o)servations are categori=e, into five life$cycle stages an, assigne, to groups such that an
12
appro'imately eKual num)er of o)servations are in each group 2ro/th, 2ro/th>7ature, 7ature,
7ature>Decline, an, Decline+ 1n this paper, a start$up stage is also a,,e, compose, of a smaller
set of firm$years+
H
The criteria for a start$up firm$year o)servation are the follo/ing
1+ Firm /as foun,e, )et/een 1?7% an, 1??A+
2+ Firm /as not forme, as a result of a ,ivestiture, merger, or other form of restructuring+
H+ Firm ha, no more than one year of sales history prior to going pu)lic+
A+ @nly the first three years of firm ,ata are inclu,e, after the foun,ing ,ate+
These firms, in their first three years, are classifie, as start$up firm$years+ This classification
assumes that the firm ,oes not move into the gro/th stage any sooner than three years from
inception+ Relative value$relevance tests of the hypotheses are performe, in each of si' life$
cycle stage portfolios+
Sample Selection
Data are o)taine, from Compustat !Annual an, Research# 1?7%$1??" ,ata sources for the
financial statement varia)les an, market values+ Data for firm age is o)taine, from Mood+6s
Industrial Manual+ The sample is restricte, to firms for /hich life$cycle classification ,ata an,
cash flo/ an, earnings ,ata are availa)le+ Utilities, insurance, an, financial institutions are not
inclu,e, in the stu,y, ,ue to their uniKue characteristics as regulate, in,ustries+ The reKuirement
for life$cycle classification ,ata resulte, in a potential sample si=e of 7&,&1H total firm$year
o)servations+ ReKuire, ,ata for regression varia)les further re,uce, the sample to H7,?%1 firm$
year o)servations
1?2 5tart$up o)servations
7,1%2 2ro/th o)servations
1H
7,H"0 2ro/th>7ature o)servations
%,1%? 7ature o)servations
&,"1A 7ature>Decline o)servations
&,"7A Decline o)servations
Descriptive statistics !me,ians# are given in Ta3l% " for the firm$year o)servations in
each of the life$cycle stages+ These inclu,e the classification varia)les use, in the multivariate
classification an, other firm characteristics+ These ,escriptive statistics in,icate that the
classification metho, is successful, resulting in cross$sectional ,ifferences in firm characteristics
across life$cycle stages+
The start2up group has relatively lo/ ,e)t, negative earnings, operating cash flo/s, an,
investing cash flo/s+ 5tart$up firms are smaller an, younger than firms in other life$cycle
groups, although their sales gro/th is high+
The gro%t/ portfolio of firm$years e'hi)its positive earnings, operating cash flo/s an,
financing cash flo/s+ The me,ian gro/th firm pays fe/, if any ,ivi,en,s, investing cash flo/s
are negative, an, its ,e)t is higher than a start$up firm+ 3y construction the sales gro/th an,
capital e'pen,iture ratios are largest for the gro/th portfolio an, are lo/er in the other life$cycle
portfolios+ 2ro/th firms are still relatively small compare, to the mature firms+
Firms in the gro%t/7mature an, mature portfolios are much larger an, pay more
,ivi,en,s than in the earlier an, later stages8 ,e)t is relatively high8 net income an, operating
cash flo/s are positive, an, investing an, financing cash flo/s are negative+
Firms in mature7decline an, decline have lo/er earnings an, operating cash flo/s
!negative for ,ecline firms#8 they are smaller, have less ,e)t, have fe/ financing cash flo/s or
investing cash flo/s, an, pay fe/ ,ivi,en,s+
1A
Ta3l% 0 sho/s the in,ustry composition of each of the life$cycle stage portfolios an,
Ta3l% 2 gives the num)er of firm$year o)servations )y year for each of the life$cycle stages+
From these ta)les it appears that there is some clustering of in,ustry an, years in the life$cycle
stage portfolios+ .lustering )y in,ustry is to )e e'pecte,, )ecause in,ustries also have life$
cycles that affect the firm life$cycle+ 7acroeconomic effects !)usiness cycles# are also relate, to
firm life$cycle an, cause time clustering+ 9o/ever, the fact that firms start$up, for e'ample,
/hen economic con,itions are favora)le, or in promising in,ustries, shoul, not affect the relative
value$relevance tests of accounting performance measures as long as these omitte, varia)les are
not correlate, /ith the varia)les of interest+
To su)stantiate the classification metho,ology an, to make sure that ran,om economic
effects are not creating misclassification, a check is ma,e on the sta)ility of the firm$year
classifications+ 1f a firm$year o)servation is classifie, in a life$cycle stage portfolio, an
e'amination is ,one one an, t/o years prior to an, after the year of classification to see in /hich
life$cycle stage the firm is classifie, in those years+
The start$up group, )y construction, has no firm$year o)servations classifie, in other
stages prior to the classification year+ %0N of firms that are classifie, as start$up remaine, in the
start$up group from one year to the ne't+ T/o years after )eing inclu,e, in the start$up portfolio
7?N of these firms are no longer in the start$up portfolio8 2%N of the start$up firms are in the
gro/th stage, none are in the mature stage, H1N are in the ,ecline stage+ The remain,er of the
start$up firms is not classifie, in a life$cycle stage portfolio /ithin t/o years after )eing inclu,e,
in the start$up portfolio+
1"
A similar check of the other life$cycle stages in,icates sta)ility+ For firm$years classifie,
as gro%t/ firms in any year "1N are in the gro/th stage t/o years prior an, "AN remaine, in the
gro/th portfolio t/o years after )eing inclu,e, in the gro/th portfolio+ %7N of the mature firm$
years are in the mature stage t/o years prior to )eing inclu,e, in the mature portfolio an, t/o
years after inclusion 70N are still in the mature phase+ A?N of the decline firm$years are in the
,ecline stage t/o years prior to )eing inclu,e, in the ,ecline portfolio an, t/o years after
inclusion %AN are still in the ,ecline phase+
1n Ta3l% 45 <earson correlations of the regression coefficients are given+ 1n the start$up
stage there is some evi,ence of the collinearity of (1 an, .F@, as /ell as .FF /ith .F@ an,
.F1+ 1n the other life$cycle stages all of the varia)les are significantly correlate, /ith each other+
This in,icates that these varia)les measure some of the same value relevant factors+ The
empirical tests are ,esigne, to ,etermine /hich accounting performance measure is most value
relevant in a particular life$cycle stage, regar,less of overlap in information provi,e, /ith other
measures+
,mpirical 8ests
Tests of the relative value$relevance hypotheses are performe, using 0al, tests on the
significance of the sKuare, coefficients+ 3i,,le, 5eo/, an, 5iegel !1??"# ,evelop a
metho,ology for the pro)lem of testing /hether one su)set of pre,ictor varia)les is significantly
more e'planatory than another su)set+ This metho,ology is appropriate asymptotically /hen the
,istur)ances coul, )e heteroske,astic an, assumes that the error terms,
i
, from eKuations !Aa$c#
are vectors of uno)serve, ran,om ,istur)ances that are normally ,istri)ute, /ith mean =ero an,
unkno/n covariance matri'+ T/o ,ifferent matrices represent su)sets of pre,ictor varia)les8
1%
each consists of a su)set of columns of the in,epen,ent varia)les+ The o)Dect is to test /hether
one su)set of pre,ictor varia)les is significantly )etter than the other for the purpose of
e'plaining the ,epen,ent varia)le, 7M6+
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'FO
it
+ 1
it
/4a1
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'F%
it
+
it
/431
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'FF
it
+ &
it
/4c1
/here, M*, O the market value of eKuity for firm i at time t+
$I O earnings )efore e'traor,inary items for firm i at time t.
C9: O cash flo/ from operating activities for firm i at time t.
C9I O cash flo/ from investing activities for firm i at time t.
C99 O cash flo/ from financing activities for firm i at time t+
17
(ull hypotheses for the relative value$relevance hypotheses )ecome
(ull 9ypotheses 5U356T 1 5U356T 2 6PUAT1@(
(1 O
R
.F@ (1 .F@ Aa
(1 O
R
.F1 (1 .FF A)
(1 O
R
.FF (1 .F1 Ac
/here, the sign, O
R
, signifies that each of the su)sets of varia)les is eKually value$relevant+
1n general /hen comparing the Kuality of t/o sets of pre,ictors, Q
1
an, Q
2
, the matri' R
1
consists of the columns of Q that are not in Q
1
, an, similarly for R
2
+ 3
1
an, 3
2
are su)sets !1
an, 2, a)ove# of regression coefficients for R
1
an, R
2,
, respectively+ Thus, the null hypothesis
)ecomes in general form !eKuation H+1 from 5iegel S 3i,,le 1??A#
(
O
) B
1
*+
1
*,%
n
- .
1
(.
1
*.
1
)
-1
.
1
/0+
1
B
1
= B

*+

*,%
n
- .

(.

*.

)
-1
.

/0+

B

/61
This nonlinear hypothesis is of Kua,ratic form in the regression coefficients+ The left$
han, si,e of the hypothesis represents the )ias ,ue to omitting R
1
from the regression, keeping
only Q
1
, /hich is a Kua,ratic form in the omitte, regression coefficients 3
1
+ The right$han, si,e
represents the )ias /hen R
2
is omitte,+ The test result is then compute, using the estimate,
coefficients an, their heteroske,asticity$a,Duste, variance$covariance matri'+ 5iegel an, 3i,,le
sho/ that the 0al, test is asymptotically vali, an, is appropriate /hen specific hypotheses are
prespecifie, as is the case in this paper+ A77%n'i8 A sho/s the ,erivation of each of the tests
of the relative value$relevance tests of the null hypotheses+ These tests are performe, for
portfolios of firm$year o)servations that Kualify for inclusion in one of the four life$cycle stages
!start$up, gro/th, mature, an, ,ecline# an, t/o transition stages !gro/th>mature an,
mature>,ecline#+
1&
R%(-l&(
Results of the relative value$relevance tests are foun, in Ta3l%( 6 , "9+ 1n general, the
hypotheses are supporte,+ The results provi,e evi,ence that cash flo/ measures are more value$
relevant than earnings in start$up, gro/th, an, ,ecline stages+ 6arnings are more value relevant
in mature stages+
1n the start2up stage, the hypotheses pre,ict that the cash flo/ measures are more value$
relevant than earnings+ 6vi,ence provi,e, in Ta)le " supports the hypothesis that investing cash
flo/s are more value relevant than earnings for start$up firms+ 1n the regression of eKuation A),
.F1 is the only significant in,epen,ent varia)le an, the 0al, X
2
statistic is significant+ The 0al,
X
2
statistic measures /hether the information provi,e, )y one varia)le is significantly ,ifferent
from that provi,e, )y another+ 1t ,oes not, ho/ever, tell /hich measure has greater information+
To ,o this, the R
2
statistic is nee,e, for regressions of eKuation H, su)stituting the ,ifferent
in,epen,ent varia)les for -$A. Ta)le ", <anel 3, R
2
statistics from regressions of eKuation H
provi,e evi,ence that .F1 !R
2
O 0+HH# is more value$relevant than earnings !R
2
O 0+12#+ (either
operating nor financing cash flo/s is significantly more value$relevant than earnings, although
the R
2
statistics are higher for these varia)les than for earnings+
1n the gro%t/ stage, the hypotheses pre,ict that the cash flo/ measures are more value$
relevant than earnings+ Results for this stage are provi,e, in Ta)le %+ The results support the
hypothesis that operating cash flo/s are more value relevant than earnings for gro/th firms+ 1n
the regression of eKuation Aa, .F@ an, 3M6 are incrementally significant, )ut not (1+ The 0al,
X
2
statistic is significant+ The R
2
statistics in Ta)le %, <anel 3 provi,e evi,ence that .F@ !R
2
O
1?
0+&0# is more value$relevant than earnings !R
2
O 0+77#+ (either investing nor financing cash
flo/s is significantly more value$relevant than earnings+
The hypotheses pre,ict that earnings are more value$relevant than cash flo/ measures in
the gro%t/7mature stage+ Results for this stage are provi,e, in Ta)le 7+ The results provi,e
evi,ence that earnings are more value$relevant than each of the cash flo/ measures for
gro/th>mature firms+ 1n the regression of eKuations Aa$c, (1 is significant in each of the
regressions+ The operating an, financing cash flo/ measures are only marginally significant,
an, investing cash flo/s are not significant+ 0al, X
2
statistics are significant in each of the
regressions+ The R
2
statistics in Ta)le 7, <anel 3 provi,e evi,ence that (1 !R
2
O 0+&0# is more
value$relevant than .F@ !R
2
O 0+7"#, .F1 !R
2
O 0+7"#, or .FF !R
2
O 0+7A#+
The hypotheses pre,ict that earnings are more value$relevant than cash flo/ measures in
the mature stage+ The results, Ta)le &, provi,e evi,ence that earnings are more value$relevant
than each of the cash flo/ measures for mature firms+ (1 is significant in each of the regressions
of eKuations Aa$c+ @perating an, investing cash flo/ measures are incrementally significant, )ut
financing cash flo/s are only marginally significant+ 0al, X
2
statistics are significant in each of
the regressions+ The R
2
statistics in Ta)le &, <anel 3 provi,e evi,ence that (1 !R
2
O 0+&7# is
more value$relevant than .F@ !R
2
O 0+&2#, .F1 !R
2
O 0+&1#, or .FF !R
2
O 0+7?#+
The hypotheses pre,ict that earnings are more value$relevant than cash flo/ measures in
the mature7decline stage+ 9o/ever, results, sho/n in Ta)le ?, provi,e evi,ence that operating
cash flo/s are more value$relevant than earnings+ 6arnings, also, ,o not appear to )e more
value$relevant than investing or financing cash flo/ measures for mature>,ecline firms+ (1 is
incrementally significant only in the regression of eKuation Aa+ @perating an, investing cash
20
flo/ measures are incrementally significant, )ut financing cash flo/s are not significant+ 0al,
X
2
statistics are significant only in eKuation Aa+ The R
2
statistics in Ta)le ?, <anel 3 provi,e
evi,ence that .F@ !R
2
O 0+&0# is more value$relevant than (1 !R
2
O 0+7%#+ For .F1 !R
2
O 0+7&#
an, .FF !R
2
O 0+7%# the evi,ence suggests that the value$relevance of these measures of cash
flo/ is at least as goo, as the value$relevance of earnings for firms in the mature>,ecline stage+
1n the decline stage, the hypotheses pre,ict that cash flo/ measures are more value$
relevant than earnings+ Ta)le 10 provi,es results that support the hypothesis that operating cash
flo/s are more value$relevant than earnings+ .F@, )ut not (1, is incrementally significant in the
regression of eKuation Aa+ 0al, X
2
statistics are significant only in eKuation Aa+ The R
2
statistics
in Ta)le 10, <anel 3 provi,e evi,ence that .F@ !R
2
O 0+A&# is more value$relevant than (1 !R
2
O
0+H?#+ For .F1 !R
2
O 0+H&# an, .FF !R
2
O 0+H7# the evi,ence suggests that the value$relevance
of these measures of cash flo/ is no )etter than the value$relevance of earnings for firms in the
,ecline stage+
Although not teste, ,irectly, the e'planatory po/er of the mo,els appear to )e much
)etter in the gro/th, gro/th>mature, mature, an, mature>,ecline stages+ The R
2
statistics of the
regressions in these stages /as on the or,er of 0+&0, /hile in the start$up an, ,ecline stages the
R
2
statistics are much lo/er !0+12 to 0+HH for start$up an, 0+H7 to 0+A& for ,ecline portfolios#+
From these results it seems that information other than earnings an, cash flo/s is )eing use, to
,etermine market values, e+g+, intangi)les, human capital, pro)a)ility of )ankruptcy, etc+
There is also evi,ence that the si=e of the coefficients is ,ifferent ,epen,ing on the life$
cycle stage+ The earnings coefficient in the gro/th>mature an, mature stages are much larger
than in other life$cycle stages+ These mature stages are also the stages /hen earnings ,ominate
21
the cash flo/ measures+ 1n the other stages !start$up, gro/th, an, ,ecline#, the earnings
coefficient is very small an, earnings ,o not ten, to )e significant in the regressions+
22
C*ncl-(i*n( an' I:7lica&i*n(
7uch of the valuation>information content research in accounting has )een ,evote, to
verifying the value$relevance>informativeness of earnings )eyon, the more EprimitiveI cash flo/
measures, particularly operating cash flo/s+ This stu,y e'amines the relative value$relevance of
not only earnings an, operating cash flo/s, )ut also e'amines investing an, financing cash
flo/s+ Also, )y e'amining the effects of the corporate life$cycle on these relationships, this
stu,y is a)le to provi,e evi,ence of the value$relevance of earnings an, cash flo/ measures in
the economic conte't of life$cycle theory+ The results of this stu,y suggest that life$cycle stages
influence the value$relevance of earnings an, cash flo/ measures+
The results provi,e evi,ence that earnings are more useful than cash flo/ measures only
in the gro/th>mature an, mature stages+ The relative value$relevance test results provi,e
evi,ence that the accrual process, /hich yiel,s earnings, gives more value$relevant information
than operating cash flo/s in the gro/th>mature an, mature life$cycle stages+ 6arnings are also
more value$relevant than investing an, financing cash flo/s in these t/o stages+ @nly a)out
one$thir, of the o)servations are in this stage+
For firms in early an, later life cycle stages !a)out t/o$thir,s of the o)servations#, cash
flo/ measures are more value relevant, although the particular cash flo/ measure ,iffers+
1nvesting cash flo/s are more value$relevant than earnings in the start$up stage, an, operating
cash flo/s are more value relevant than earnings in the gro/th, mature>,ecline, an, ,ecline
stages+ 1n start$up, gro/th, mature>,ecline, an, ,ecline life$cycle stages, the evi,ence suggests
that cash flo/ measures are at least as value$relevant as earnings, /hich supports the usefulness
of the cash flo/ statement, provi,e, for in FA5 ?"+ This evi,ence implies that in the early an,
2H
later life$cycle stages of the firm earnings may not )e the summary measure that investors an,
cre,itors shoul, focus on+ 6arnings ,o not ,ominate the cash flo/ measures in these early an,
later stages /hen gro/th is occurring or /hen the long$term via)ility of the firm is in Kuestion+
1mplications of this stu,y apply to researchers, analysts, e,ucators, an, firm
management+ Results /ill )e /eaker, an, may lea, to inaccurate conclusions, if researchers on
the value$relevance of accounting an, non$accounting ,isclosures assume that these ,isclosures
are eKually value$relevant in all life$cycle stages+ Analysts nee, to )e a/are of the changing
value$relevance of these an, other accounting measures throughout the life cycle+ 6,ucators an,
most te't)ooks, in general ,iscuss the statement of cash flo/s last an, ,o not give it the
emphasis that it nee,s given the results of this stu,y+ Also, firm management nee, not focus, nor
)e evaluate,, on earnings as the most value$relevant accounting num)er in all life$cycle stages of
the firm+
A su)Dect for future stu,y is the e'amination of the value$relevance of other accounting
varia)les in life$cycle stages, particularly for start$up an, ,ecline firms, /hen the R
2
statistics are
much lo/er+ This stu,y provi,es evi,ence that accounting performance measures !earnings an,
cash flo/ varia)les# have limite, usefulness in these stages+ Therefore, other accounting
varia)les can )e e'amine, for informativeness, such as research an, ,evelopment e'pen,itures
an, other intangi)les, such as access to technology an, human capital+ A call has )een ma,e for
this line of research !;ev 1??7#+ 6'amining firms in these early an, late life$cycle stages can
enhance the potential for po/erful results+
2A
EN;NOTES
1
@ther e'amples in the )usiness press inclu,e E.ash is king,I Small Business Reports 1??1, pp+
A&$"%8 E.ash is king for corporate 4apan,I Business 'ee& 1??", p+ H78 E0here cash flo/ is
king,I 8/e ,conomist 1??", p+ &0+
2
1ncremental value$relevance is concerne, /ith the overlap of the circles+ For e'ample, if the
information from earnings is in circle A, an, the information from one of the cash flo/ measures
is in circle 3, circles A an, 3 can overlap to some e'tent an, )oth may )e incremental to the
other unless the circles are coinci,ental+ 3ut, tests of incremental informativeness or value$
relevance ,o not test for /hich circle is larger the other+ For a more e'tensive ,iscussion on
relative vs+ incremental information content see 3i,,le, 5eo/, an, 5iegel !1??"#+
H
Despite the fact that the great maDority of firms on Compustat an, CRS; are in later life$cycle
stages, a sample of 1?2 firm$years is o)taine, for the start$up group+ 7ikkelson an, 5hah
!1??H# in a stu,y of 1<@ firms, foun, a su)stantial num)er of firms !"2# ,uring the 1?&0 $ &H
time perio,, /hich ha, gone pu)lic, ha, ,ata availa)le on Compustat, an, ha, no more than one
year of sales history+ They provi,e, me /ith a listing of these firms+ 1 have also )een a)le to
use an 1<@ ,ata)ase provi,e, )y 4ay Ritter to get some of the stock return ,ata for these firms+
Data from these sources are supplemente, /ith ,ata o)taine, from Compustat, CRS;, Mood+6s
Industrial manual, an, annual reports to complete the ,ata reKuirements for firms, /hich meet
the criteria for start$ups+ This group consists of over a hun,re, firms that have ,ata on
.ompustat or in annual reports+
2"
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27
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0hite, 2+1+, A+.+ 5on,hi, an, D+Frie,, 8/e Anal+sis and -se o) 9inancial Statements, 1??7,
5econ, 6,ition, 4ohn 0iley S 5ons, (R, (R+
,1& net income )efore e'traor,+ items an, ,iscontinue, operations
U ,1A Depreciation an, amorti=ation !0 if missing#
U ," .hange in total current lia)ilities
$ ,HA .hange in current ,e)t !0 if missing#
$ ,A .hange in total current assets
U ,1 .hange in cash S cash eKuivalents !0 if V1 missing#
U ,7A .hange in )alance sheet ,eferre, ta'es !V"0, income
statement ,eferre, ta'es, if missing+ 0 if )oth missing#+
2&
Ta3l% "
;%(cri7&iv% S&a&i(&ic( 3! Li+%,C!cl% S&a.% /M%'ian(1
< O3(%rva&i*n( 1?2 7,1%2 7,H"0 %,1%? &,"1A &,"7A
Varia3l% S&ar&,-7 Gr*=&) Gr*=&)>
Ma&-r%
Ma&-r% Ma&-r%>
;%clin%
;%clin%
7arket Malue of
6Kuity
1%+"2 21+?" 1%A+1? 20&+A7 2A+%A 10+?1
3ook Malue of
6Kuity
H+A0 12+1% 11"+1H 12&+&A 1H+7H A+A1
(et 1ncome $0+2? 0+%% 1A+7% 1%+1" 0+1% $0+"2
.ash Flo/ from
@perations
$0+%0 0+&? 20+1& 22+0% 0+?1 $0+02
.ash Flo/ from
1nvesting
$0+&H $H+&& $21+?0 $1?+H7 $1+1? $0+1%H
.ash Flo/ from
Financing
1+?H 1+&% $0+H1 $1+"7 0 0
5ales 2ro/th !N# 27+21 H&+H2 12+H0 &+2? %+1% $1H+2A
.apital
6'pen,iture Ratio
0+0? 0+1H 0+10 0+07 0+0A 0+02
.apital
6'pen,itures
0+2? A+21 21+&0 H+?" 1+1A 0+22
Divi,en, <ayout
Ratio
0 0 0+HH 0+H% 0 0
5i=e
!Total Assets#
"+0" 2?+?7 2%?+"? 2&2+%2 HH+&% 12+"2
De)t to 6Kuity
Ratio
0+0% 0+A2 0+"7 0+A? 0+H0 0+1%
Firm Age 2+H% 1%+A& 2A+AH HH+"1 H&+%A AH+%"
;%+ini&i*n *+ Varia3l%(:
7arket value of eKuity !in Wmillions#, shares outstan,ing Q fiscal year closing price !,2"-,1??#+
3ook value of eKuity !in Wmillions#, ,%0+
(et income )efore e'traor,inary items an, ,iscontinue, operations !in Wmillions#, ,1&+
.ash flo/ from operating activities !in Wmillions#, .ompustat ,H0& for years 1?&7$1??H8
prior to 1?&7, .F@ is calculate, as
2?
.ash flo/ from financing activities !in Wmillions#, .ompustat ,H1H for years 1?&7$1??H8
prior to 1?&7, .FF is calculate, as
,? Total long term ,e)t
U ,1H0 <referre, stock $ carrying value !0 if missing#
U ,&" .ommon 5tock
U ,210 .apital 5urplus
$ ,127 .ash Divi,en,s !0 if missing#+
.ash flo/ from financing activities !in Wmillions#, .ompustat ,H1H for years 1?&7$1??H8
prior to 1?&7, .F1 is calculate, as
.hange in .ash ! ,1%2# $ .FF $ .F@+
5ales 2ro/th O F!5A;65
t
$ 5A;65
t$1
# > 5A;65
t$1
G Q 100+ !5A;65 O ,12#
.apital 6'pen,iture Ratio O !.6
t
>3ook Malue
t
# Q 100+ !.6 O ,12&8 MA;U6 O ,%0#
.apital 6'pen,itures !,12&#+
Divi,en, <ayout Ratio is 0I*
t
7 $I
t
> <<, /here, 0I* O Annual Divi,en, !,127#8 $I O Annual (et
1ncome !,1&#+
5i=e is total assets !in Wmillions#, ,efine, as .ompustat ,%+
De)t to eKuity ratio ,efine, as .ompustat !,1&1 $ ,"#>,21%+
Firm Age is the age of the firm, compute, as the ,ifference )et/een the current year an, the year the
)usiness /as incorporate,, e'cept for the start$up sample, /hich is the ,ifference )et/een the current year
an, the first year the company reporte, sales+
H0
Ta3l% 0
In'-(&r! C*:7*(i&i*n 3! Li+%,C!cl% S&a.%
In'-(&r! S&ar&,
-7
Gr*=&) G>M Ma&-r% M>; ;%clin% T*&al
00$0? L Agriculture S
.onst+ 7atJl
0 A1 H0 H% "% %1 22A
10$1A L 7ining, @il S
2as
2 1A"2- H0H H10 7A&- 21% H0H1
1"$1? L .onstruction 0 ?A 117 10& 1"?- 10& "&%
20$22 L .onsumer
2oo,s S Foo,
0 2H& %&?- A7%- 211 "&"- 21??
2H$2" L Apparel 0 1A? H2? 2?& H2" A17- 1"1&
2%$27 L 3usiness 5up+,
<rinting, S <u)lishing
A 1%1 "&1- A0&- 1"" H01 1%10
2& L <harmaceuticals S
.hemicals
1" 2&H A%? ""%- &2H- HH% 2A&2
2? $ @il an, 2as
Refineries S Retail
0 H1 1?"- 1%H- 21 %0 A70
H0 L Ru))er S <lastic 2 1%2 2A2- 1"?- 1HH 10& &0%
H1$HH L 7anufacture,
<ro,Js 5teel, .onst+
7atJl, S .lothing
% 1?1 A21- H7%- 21& %&%- 1&?&
HA L Fa)ricate, <ro,Js H 1%7 HH"- 2&H- 21" H&"- 1H&&
H" L 7achinery 2?- %"% %AA ""H 1012- ?H"- H&2?
H% L 6lectrical 6K+ 12 7&?- A7? AH2 ?7?- 7A? HAA0
H7 L Autos, Rail, 5hips
S Aircraft
7 1%H HH?- 2%?- 1&A 2%" 1227
H&$H? L 7e,ical,
7easurJg S .ontrol 6K
21 "1A A&? A?1 111A- "&0 H20?
"0$"? L 0holesale S
Retail
H7 11"7 1217 &7" ??H 22H7- %"1%
70$&? L Restaur+,
;o,ging, .omputers,
3us+ S <ers+ 5ervices
"2- &&H- A%" H7A 107%- "A1 HH?1
?0$?? L @ther 2 H1 % 2 ?2- A 1H7
T*&al( 3! Li+%,C!cl%
S&a.% 1?2 71%2 7H"0 %1%? &"1A &"7A H7?%1
An a(&%ri( /?1 in'ica&%( a (i.ni+ican& .

=)%r% *3(%rva&i*n( =%r% (i.ni+ican&l! .r%a&%r &)an &)% *v%rall
'i(&ri3-&i*n.
H1
Ta3l% 2
Fir:,Y%ar O3(%rva&i*n( +*r Eac) Y%ar 3! Li+%,C!cl% S&a.%
Y%ar S&ar&,-7 Gr*=&) Gr*=&)>
Ma&-r%
Ma&-r% Ma&-r%>
;%clin%
;%clin% T*&al 3!
Y%ar
1?77 1 220 %27- HA%- 1A? 2%? 1%12
1?7& 1 2AH %01- 2?%- 1"2 2A" 1"H&
1?7? 2 272 "7A- H0A- 17" H1" 1%A2
1?&0 H 22? "1"- H&H- 20" "A&- 1&&H
1?&1 11 AH?- "2?- HAA 2%0 A2A 2007
1?&2 2%- H0H H&A H72 H?& %71- 21"A
1?&H H2- HHH A1" H%7 H?% "77- 2120
1?&A 2%- %2&- "10- 2?% H2A H"H 21H7
1?&" 27- HH& HHH H"H A?7 ""A- 2102
1?&% 1?- HA& 2?& H0? A?1- AA7 1?12
1?&7 1" "77- H"? H0" A&2 HA1 207?
1?&& 1H A?A- H"H HH2 AA% H77 201"
1?&? H H&A H1H 2?% "1H %71- 21&0
1??0 A AHA H0& H17 "12 707- 22&2
1??1 2 2AA 1?1 2&0 %7A- &72- 22%H
1??2 A 2&2 20% 2?A 72%- &1H- 2H2"
1??H H HAH 2A" 2?% 7"H- 10? 17A?
1??A 0 "%A- HH0 H%H %&1- 1A7 20&"
1??" 0 A&7- 2"? H1% %&0- 1HA 1&7%
T*&al 1?2 71%2 7H"0 %1%? &"1A &"7A H7?%1
An a(&%ri( /?1 in'ica&%( a (i.ni+ican& .

=)%r% *3(%rva&i*n( =%r% (i.ni+ican&l! .r%a&%r &)an &)% *v%rall
'i(&ri3-&i*n.
H2
Ta3l% 4
R%.r%((i*n Varia3l% C*rr%la&i*n( 3! Li+%,C!cl% S&a.%
A. S&ar&,-7
7M6 3M6 (1 .F@ .F1
3M6 0+17
(1 $0+0" $0+02
.F@ $0+0A $0+0A 9.0#
.F1 $9.0# $0+1? $0+0H $0+01
.FF 0+0? 0+0H $0+1H ,9.@4 ,9.2$
B. Gr*=&)
7M6 3M6 (1 .F@ .F1
3M6 9.$#
(1 9.@9 9.@#
.F@ 9.AA 9.AA 9.@9
.F1 $9.@" ,9.6# ,9.02 9.24
.FF 9.2# 9.2# 9.96 ,9.@$ ,9.$$
C. Gr*=&)>Ma&-r%
7M6 3M6 (1 .F@ .F1
3M6 9.$A
(1 9.$$ 9.#9
.F@ 9.$2 9.#2 9.#0
.F1 ,9.A# ,9.$A ,9.$4 ,9.22
.FF ,9.09 ,9.04 ,9.0# ,9.$# 9."9
;. Ma&-r%
7M6 3M6 (1 .F@ .F1
3M6 9.$#
(1 9.#0 9.#0
.F@ 9.#9 9.#2 9.#0
.F1 $9.$9 ,9.$9 ,9.A# ,9.$@
.FF ,9."4 ,9.02 ,9.09 ,9.02 ,9.0A
B*l' in'ica&%( (i.ni+icanc% a& &)% 9.96 l%v%l.
HH
Ta3l% 4
R%.r%((i*n Varia3l% C*rr%la&i*n( 3! Li+%,C!cl% S&a.% /c*n&in-%'1
E. Ma&-r%>;%clin%
7M6 3M6 (1 .F@ .F1
3M6 9.$$
(1 ,9."" ,9."4
.F@ 9.A# 9.A@ ,9.40
.F1 ,9.@A ,9.@4 9."6 ,9.A$
.FF 9."0 9."2 9."# 9.94 ,9.@0
F. ;%clin%
7M6 3M6 (1 .F@ .F1
3M6 9.@$
(1 9.4" 9.4@
.F@ 9.60 9.2$ 9.40
.F1 $9.02 ,9."$ ,9.0$ ,9.4$
.FF ,9.90 ,9.92 9.90 9.09 ,9.@"
B*l' in'ica&%( (i.ni+icanc% a& T) 9.96 l%v%l.
HA
Ta3l% 6
R%(-l&( *+ R%la&iv% Val-% R%l%vanc% *+ Earnin.( an' Ca() Fl*=( , START,UB
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'FO
it
+ 1
it
/4a1
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'F%
it
+
it
/431
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'FF
it
+ &
it
/4c1
Panel A: Regression Results
R%.r%((i*n Varia3l%
EC-a&i*n
4a /CFO1
C*%++ici%n& E(&i:a&%
43 /CFI1
C*%++ici%n& E(&i:a&%
4c /CFF1
C*%++ici%n& E(&i:a&%
%ntercept
BVE
"%
'FO
'F%
'FF
Wal' .

S&a&i(&ic
,"9.06?
0+7A
$0+"?
$1+22
0+00H
p$value O 0+?"
,"0.4@?
0+&7
$0+AA
,9.26?
2.@#
7,val-% D 9.96
,#.20?
0+??
$0+7"
0+H%
0+"21
p$value O 0+A7
?Si.ni+ican& a& &)% 6 7%rc%n& l%v%l.
H"
Ta3l% 6 /c*n&in-%'1
MVE
it
= a
#
+ a

BVE
it
+ a

!"A
it
+ e
it
$ /21
Panel B: R
2
Results of Regressions of Equation (3).
CFO CFI CFF
H!7*&)%(i( T%(& NI E
R
CFO
CFO E
R
NI
NI E
R
CFI
CFI E
R
NI
NI E
R
CFF
CFF E
R
NI
Br%'ic&i*n (@ R65 (@ R65 (@ R65
R
0
*+ EC-a&i*n /21 =i&)
'i++%r%n& varia3l%(
r%7r%(%n&in. !"A
$I1 R
2
O 0+12
C9:1 R
2
O 0+1"
$I1 R
2
O 0+12
C9I1 R
2
O 0+HH
$I1 R
2
O 0+12
C991 R
2
O 0+20
M*, O the market value of eKuity for firm i at time t+
B*, O the )ook value of eKuity for firm i at time t+
-$A O the unreali=e, net assets of firm i at time t !pro'ies use, are (1, .F@, .F1, S .FF#+
$I O earnings )efore e'traor,inary items for firm i at time t.
C9: O cash flo/ from operating activities for firm i at time t.
C9I O cash flo/ from investing activities for firm i at time t.
C99 O cash flo/ from financing activities for firm i at time t+
H%
Ta3l% @
R%(-l&( *+ R%la&iv% Val-% R%l%vanc% *+ Earnin.( an' Ca() Fl*=( , GROWTH
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'FO
it
+ 1
it
/4a1
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'F%
it
+
it
/431
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'FF
it
+ &
it
/4c1
Panel A: Regression Results
R%.r%((i*n Varia3l%
EC-a&i*n
4a /CFO1
C*%++ici%n& E(&i:a&%
43 /CFI1
C*%++ici%n& E(&i:a&%
4c /CFF1
C*%++ici%n& E(&i:a&%
%ntercept
BVE
"%
'FO
'F%
'FF
Wal' .

S&a&i(&ic
0@.A$?
".0#?
$0+"1
".$9?
2.0@
7,val-% D 9.96
04.6#?
".49?
0+AH
,9.4#?
0+?0
p$value O 0+HA
0@.6@?
".60?
0+27
0+2&
0+2&
p$value O 0+%0
?Si.ni+ican& a& &)% 6 7%rc%n& l%v%l.
H7
Ta3l% @ /c*n&in-%'1
MVE
it
= a
#
+ a

BVE
it
+ a

!"A
it
+ e
it
$ /21
Panel B: R
2
Results of Regressions of Equation (3).
CFO CFI CFF
H!7*&)%(i( T%(& NI E
R
CFO
CFO E
R
NI
NI E
R
CFI
CFI E
R
NI
NI E
R
CFF
CFF E
R
NI
Br%'ic&i*n (@ R65 (@ R65 (@ R65
R
0
*+ EC-a&i*n /21 =i&)
'i++%r%n& varia3l%(
r%7r%(%n&in. !"A
$I1 R
2
O 0+77
C9:1 R
2
O 0+&0
$I1 R
2
O 0+77
C9I1 R
2
O 0+7&
$I1 R
2
O 0+77
C991 R
2
O 0+77
M*, O the market value of eKuity for firm i at time t+
B*, O the )ook value of eKuity for firm i at time t+
-$A O the unreali=e, net assets of firm i at time t !pro'ies use, are (1, .F@, .F1, S .FF#+
$I O earnings )efore e'traor,inary items for firm i at time t.
C9: O cash flo/ from operating activities for firm i at time t.
C9I O cash flo/ from investing activities for firm i at time t.
C99 O cash flo/ from financing activities for firm i at time t+
H&
Ta3l% A
R%(-l&( *+ R%la&iv% Val-% R%l%vanc% *+ Earnin.( an' Ca() Fl*=( F GROWTH>MATURE
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'FO
it
+ 1
it
/4a1
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'F%
it
+
it
/431
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'FF
it
+ &
it
/4c1
Panel A: Regression Results
R%.r%((i*n Varia3l%
EC-a&i*n
4a /CFO1
C*%++ici%n& E(&i:a&%
43 /CFI1
C*%++ici%n& E(&i:a&%
4c /CFF1
C*%++ici%n& E(&i:a&%
%ntercept
BVE
"%
'FO
'F%
'FF
Wal' .

S&a&i(&ic
2+HA
9.$"?
A.@9?
,9.#@??
$.4@
7,val-% D 9.9"
7+"A
9.@2?
@.6A?
$0+20
$.44
7,val-% D 9.9"
$&+1"
9.@@?
@.#"?
9.A0??
#."A
7,val-% D 9.9"
?Si.ni+ican& a& &)% 6 7%rc%n& l%v%l.
??Si.ni+ican& a& &)% "9 7%rc%n& l%v%l.
H?
Ta3l% A /c*n&in-%'1
MVE
it
= a
#
+ a

BVE
it
+ a

!"A
it
+ e
it
$ /21
Panel B: R
2
Results of Regressions of Equation (3).
CFO CFI CFF
H!7*&)%(i( T%(& NI E
R
CFO
CFO E
R
NI
NI E
R
CFI
CFI E
R
NI
NI E
R
CFF
CFF E
R
NI
Br%'ic&i*n R65 (@ R65 (@ R65 (@
R
0
*+ EC-a&i*n /21 =i&)
'i++%r%n& varia3l%(
r%7r%(%n&in. !"A
$I1 R
2
O 0+&0
C9:1 R
2
O 0+7"
$I1 R
2
O 0+&0
C9I1 R
2
O 0+7"
$I1 R
2
O 0+&0
C991 R
2
O 0+7A
M*, O the market value of eKuity for firm i at time t+
B*, O the )ook value of eKuity for firm i at time t+
-$A O the unreali=e, net assets of firm i at time t !pro'ies use, are (1, .F@, .F1, S .FF#+
$I O earnings )efore e'traor,inary items for firm i at time t.
C9: O cash flo/ from operating activities for firm i at time t.
C9I O cash flo/ from investing activities for firm i at time t.
C99 O cash flo/ from financing activities for firm i at time t+
A0
Ta3l% $
R%(-l&( *+ R%la&iv% Val-% R%l%vanc% *+ Earnin.( an' Ca() Fl*=( , MATURE
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'FO
it
+ 1
it
/4a1
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'F%
it
+
it
/431
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'FF
it
+ &
it
/4c1
Panel A: Regression Results
R%.r%((i*n Varia3l%
EC-a&i*n
4a /CFO1
C*%++ici%n& E(&i:a&%
43 /CFI1
C*%++ici%n& E(&i:a&%
4c /CFF1
C*%++ici%n& E(&i:a&%
%ntercept
BVE
"%
'FO
'F%
'FF
Wal' .

S&a&i(&ic
1H+H0
0+22
#.24?
".46?
A.@@
7,val-% D 9.9"
$1+&H
9.22?
#.#0?
,9.#A?
"".AA
7,val-% D 9.9"
$1%+?0
9.69?
"9.@#?
9.$2??
"#.@0
7,val-% D 9.9"
?Si.ni+ican& a& &)% 6 7%rc%n& l%v%l.
??Si.ni+ican& a& &)% "9 7%rc%n& l%v%l.
A1
Ta3l% $ /c*n&in-%'1
MVE
it
= a
#
+ a

BVE
it
+ a

!"A
it
+ e
it
$ /21
Panel B: R
2
Results of Regressions of Equation (3).
CFO CFI CFF
H!7*&)%(i( T%(& NI E
R
CFO
CFO E
R
NI
NI E
R
CFI
CFI E
R
NI
NI E
R
CFF
CFF E
R
NI
Br%'ic&i*n R65 (@ R65 (@ R65 (@
R
0
*+ EC-a&i*n /21 =i&)
'i++%r%n& varia3l%(
r%7r%(%n&in. !"A
$I1 R
2
O 0+&7
C9:1 R
2
O 0+&2
$I1 R
2
O 0+&7
C9I1 R
2
O 0+&1
$I1 R
2
O 0+&7
C991 R
2
O 0+7?
M*, O the market value of eKuity for firm i at time t+
B*, O the )ook value of eKuity for firm i at time t+
-$A O the unreali=e, net assets of firm i at time t !pro'ies use, are (1, .F@, .F1, S .FF#+
$I O earnings )efore e'traor,inary items for firm i at time t.
C9: O cash flo/ from operating activities for firm i at time t.
C9I O cash flo/ from investing activities for firm i at time t.
C99 O cash flo/ from financing activities for firm i at time t+
A2
Ta3l% #
R%(-l&( *+ R%la&iv% Val-% R%l%vanc% *+ Earnin.( an' Ca() Fl*=( F MATURE>;ECLINE
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'FO
it
+ 1
it
/4a1
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'F%
it
+
it
/431
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'FF
it
+ &
it
/4c1
Panel A: Regression Results
R%.r%((i*n Varia3l%
EC-a&i*n
4a /CFO1
C*%++ici%n& E(&i:a&%
43 /CFI1
C*%++ici%n& E(&i:a&%
4c /CFF1
C*%++ici%n& E(&i:a&%
%ntercept
BVE
"%
'FO
'F%
'FF
Wal' .

S&a&i(&ic
A".4"?
".96?
9.A6?
0.69?
"6.66
7,val-% D 9.9"
A4."@?
".0$?
$0+2"
,".9A?
1+?"
p$value O 0+1%
A2.4$?
".4A?
$0+H1
0+0?
0+11
p$value O 0+7A
?Si.ni+ican& a& &)% 6 7%rc%n& l%v%l.
??Si.ni+ican& a& &)% "9 7%rc%n& l%v%l.
AH
Ta3l% # /c*n&in-%'1
MVE
it
= a
#
+ a

BVE
it
+ a

!"A
it
+ e
it
$ /21
Panel B: R
2
Results of Regressions of Equation (3).
CFO CFI CFF
H!7*&)%(i( T%(& NI E
R
CFO
CFO E
R
NI
NI E
R
CFI
CFI E
R
NI
NI E
R
CFF
CFF E
R
NI
Br%'ic&i*n R65 (@ R65 (@ R65 (@
R
0
*+ EC-a&i*n /21 =i&)
'i++%r%n& varia3l%(
r%7r%(%n&in. !"A
$I1 R
2
O 0+7%
C9:1 R
2
O 0+&0
$I1 R
2
O 0+7%
C9I1 R
2
O 0+7&
$I1 R
2
O 0+7%
C991 R
2
O 0+7%
M*, O the market value of eKuity for firm i at time t+
B*, O the )ook value of eKuity for firm i at time t+
-$A O the unreali=e, net assets of firm i at time t !pro'ies use, are (1, .F@, .F1, S .FF#+
$I O earnings )efore e'traor,inary items for firm i at time t.
C9: O cash flo/ from operating activities for firm i at time t.
C9I O cash flo/ from investing activities for firm i at time t.
C99 O cash flo/ from financing activities for firm i at time t+
AA
Ta3l% "9
R%(-l&( *+ R%la&iv% Val-% R%l%vanc% *+ Earnin.( an' Ca() Fl*=( , ;ECLINE
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'FO
it
+ 1
it
/4a1
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'F%
it
+
it
/431
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'FF
it
+ &
it
/4c1
Panel A: Regression Results
R%.r%((i*n Varia3l%
EC-a&i*n
4a /CFO1
C*%++ici%n& E(&i:a&%
43 /CFI1
C*%++ici%n& E(&i:a&%
4c /CFF1
C*%++ici%n& E(&i:a&%
%ntercept
BVE
"%
'FO
'F%
'FF
Wal' .

S&a&i(&ic
29.9A?
"."@?
0+"?
0.#"?
6.@$
7,val-% D 9.90
2A.2#?
".2"?
".44??
,9.@A?
0+1?
p$value O 0+%%
2$.26?
".26?
".@4?
0+H1
0+%H
p$value O 0+AH
?Si.ni+ican& a& &)% 6 7%rc%n& l%v%l.
??Si.ni+ican& a& &)% "9 7%rc%n& l%v%l.
A"
Ta3l% "9 /c*n&in-%'1
MVE
it
= a
#
+ a

BVE
it
+ a

!"A
it
+ e
it
$ /21
Panel B: R
2
Results of Regressions of Equation (3).
CFO CFI CFF
H!7*&)%(i( T%(& NI E
R
CFO
CFO E
R
NI
NI E
R
CFI
CFI E
R
NI
NI E
R
CFF
CFF E
R
NI
Br%'ic&i*n (@ R65 (@ R65 (@ R65
R
0
*+ EC-a&i*n /21 =i&)
'i++%r%n& varia3l%(
r%7r%(%n&in. !"A
$I1 R
2
O 0+H?
C9:1 R
2
O 0+A&
$I1 R
2
O 0+H?
C9I1 R
2
O 0+H&
$I1 R
2
O 0+H?
C991 R
2
O 0+H7
M*, O the market value of eKuity for firm i at time t+
B*, O the )ook value of eKuity for firm i at time t+
-$A O the unreali=e, net assets of firm i at time t !pro'ies use, are (1, .F@, .F1, S .FF#+
$I O earnings )efore e'traor,inary items for firm i at time t.
C9: O cash flo/ from operating activities for firm i at time t.
C9I O cash flo/ from investing activities for firm i at time t.
C99 O cash flo/ from financing activities for firm i at time t+
". NI D
R
CFO
Run regressions /ith 0hiteJs a,Dustment
a.
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'FO
it
+
In+*r:a&i*n c*n&%n& *+ NI:
1
it
A%
ABBEN;IX A
R%la&iv% In+*r:a&i*n C*n&%n& T%(&( in Eac) Li+%,c!cl% S&a.%
/4a1
Define X as a !n ' H# matri' /ith a column of 1s to the left of columns BVE an, NI+
Define Y as a !n ' 2# matri' /ith columns BVE an, CFO.
Define M as a !2 ' 2# matri' O YGY , YGX/XGX1
,"
XGY5 /ith elements :
iH
.
5et N D :
""
?'
2
I0 J:
00
?'
4
I0 J 0? :
"0
?'
2
? '
4
3. In+*r:a&i*n c*n&%n& *+ CFO:
Define X as a !n ' H# matri' /ith a column of 1s to the left of columns for BVE an, CFO.
Define Y as a !n ' 2# matri' /ith columns BVE an, NI+
Define M as a !2 ' 2# matri' O YGY , YGX/XGX1
,"
XGY5 /ith elements :
iH
.
5et CFO O :
""
?'
"
I0 J :
00
?'
0
I0 J 0?:
"0
?'
"
?'
0
c. U(% Wal' T%(& &* &%(& &)% +*ll*=in. r%(&ric&i*n(: N D
R
CFO.
A7
ABBEN;IX A /c*n&in-%'1
0. NI D
R
CFI
Run regressions /ith 0hiteJs a,Dustment
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'F%
it
+
it
/431
a. In+*r:a&i*n c*n&%n& *+ NI:
Define X as a !n ' H# matri' /ith a column of 1s to the left of columns BVE an, NI+
Define Y as a !n ' 2# matri' /ith columns BVE an, CFI.
Define M as a !2 ' 2# matri' O YGY , YGX/XGX1
,"
XGY5 /ith elements :
iH
.
5et N D :
""
?l
2
I0 J :
00
?l
4
I0 J 0? :
"0
?l
2
?l
4
3. In+*r:a&i*n c*n&%n& *+ CFI:
Define X as a !n ' H# matri' /ith a column of 1s to the left of columns for BVE an, CFI.
Define Y as a !n ' 2# matri' /ith columns BVE an, NI+
Define M as a !2 ' 2# matri' O YGY , YGX/XGX1
,"
XGY5 /ith elements :
iH
.
5et CFI O :
""
?l
"
I0 J :
00
?l
0
I0 J 0?:
"0
?l
"
?l
0
c. U(% Wal' T%(& &* &%(& &)% +*ll*=in. r%(&ric&i*n(: N D
R
CFI.
A&
ABBEN;IX A /c*n&in-%'1
2. NI D
R
CFF
Run regressions /ith 0hiteJs a,Dustment
MVE
it
=
#
+
1
BVE
it
+

"%
it
+
&
'FF
it
+ &
it
/4c1
a. In+*r:a&i*n c*n&%n& *+ NI:
Define X as a !n ' H# matri' /ith a column of 1s to the left of columns BVE an, NI+
Define Y as a !n ' 2# matri' /ith columns BVE an, CFF.
Define M as a !2 ' 2# matri' O YGY , YGX/XGX1
,"
XGY5 /ith elements :
iH
.
5et N D :
""
?n
2
I0 J:
00
?n
4
I0 J 0? :
"0
?n
2
? n
4
3. In+*r:a&i*n c*n&%n& *+ CFF:
Define X as a !n ' H# matri' /ith a column of 1s to the left of columns for BVE an, CFF.
Define Y as a !n ' 2# matri' /ith columns BVE an, NI+
Define M as a !2 ' 2# matri' O YGY , YGX/XGX1
,"
XGY5 /ith elements :
iH
.
5et CFF O :
""
?n
"
I0 J :
00
?n
0
I0 J 0?:
"0
?n
"
?n
0
c. U(% Wal' T%(& &* &%(& &)% +*ll*=in. r%(&ric&i*n(: N D
R
CFF.
A?
1
@ther e'amples in the )usiness press inclu,e E.ash is king,I Small Business Reports 1??1, pp+
A&$"%8 E.ash is king for corporate 4apan,I Business 'ee& 1??", p+ H78 E0here cash flo/ is
king,I 8/e ,conomist 1??", p+ &0+
2
1ncremental value$relevance is concerne, /ith the overlap of the circles+ For e'ample, if the
information from earnings is in circle A, an, the information from one of the cash flo/ measures
is in circle 3, circles A an, 3 can overlap to some e'tent an, )oth may )e incremental to the
other unless the circles are coinci,ental+ 3ut, tests of incremental informativeness or value$
relevance ,o not test for /hich circle is larger the other+ For a more e'tensive ,iscussion on
relative vs+ incremental information content see 3i,,le, 5eo/, an, 5iegel !1??"#+
H
Despite the fact that the great maDority of firms on Compustat an, CRS; are in later life$cycle
stages, a sample of 1?2 firm$years is o)taine, for the start$up group+ 7ikkelson an, 5hah
!1??H# in a stu,y of 1<@ firms, foun, a su)stantial num)er of firms !"2# ,uring the 1?&0 $ &H
time perio,, /hich ha, gone pu)lic, ha, ,ata availa)le on Compustat, an, ha, no more than one
year of sales history+ They provi,e, me /ith a listing of these firms+ 1 have also )een a)le to
use an 1<@ ,ata)ase provi,e, )y 4ay Ritter to get some of the stock return ,ata for these firms+
Data from these sources are supplemente, /ith ,ata o)taine, from Compustat, CRS;, Mood+6s
Industrial manual, an, annual reports to complete the ,ata reKuirements for firms, /hich meet
the criteria for start$ups+ This group consists of over a hun,re, firms that have ,ata on
.ompustat or in annual reports+