The impact of firm‐specific attributes on the relevance in earnings and cash‐flows : a nonlinear relationship between stock returns and accounting numbers Available to Purchase

The role of accounting information in setting security prices is one of the most fundamental issues in accounting and finance. The purpose of this study is to extend the research on the value relevance of accounting numbers in three important directions. Firstly, we consider the French context and analyze if earnings and/or cash flows are relevant to explain stock returns. Secondly, we test whether the explanatory power of accounting variables can be improved by using a nonlinear specification. Thirdly, we investigate how firm‐specific attributes such as size, debt level and firm life‐cycle influence the relative relevance of accounting measures (earnings and cash flows). Our results support a nonlinear relationship between stock returns and accounting variables. They indicate also that the relevance of earnings is conditional on size, debt level and life cycle of the firm. In contrast, the earnings change reveals more information when the firms are large, mature or characterized by a low degree of debt. These results are consistent with difference in earnings persistence between firms. With regards to cash flows, we find that they do not reveal additional information beyond that contained in earnings.