Stephen R. Goldberg

The Valuation‐relevance of Earnings and Cash Flows: an International Perspective

We investigate which variable, earnings or cash flows, provides greater information for equity valuation within the United States, the United Kingdom, Canada, Germany, and Japan. We regress returns on earnings and cash flow metrics. We generally find earnings developed in three Anglo-Saxon countries—where capital is traditionally raised in public markets and reporting rules are unencumbered by taxation requirements—to have greater explanatory power for stock returns than cash flow metrics. Conversely, in two non-Anglo-Saxon countries—where capital is traditionally raised from private sources—earnings are generally not superior to cash flows for equity valuation, except in Japan, non-consolidated sample. While sensitivity analyses generally support the conclusions of our primary tests, in some of the additional analyses, earnings were superior to cash flows for samples from all countries. As expected, in all countries earnings have incremental information content over cash flows in explaining returns. Collectively, our findings provide two contributions. First, we generalize the findings of prior US research by showing that earnings are more important than cash flows for equity valuation in other Anglo-Saxon countries. Second and more importantly, our findings demonstrate that the superiority of earnings over cash flows is not universal. Rather, it depends on the national reporting regime and attendant institutional factors.

On the Determinants of Corporate Usage of Financial Derivatives

We analyze firm characteristics associated with adoption and then level of financial derivatives usage for U.S. non‐financial firms. Interest‐rate derivatives are disaggregated from foreign‐exchange derivatives. The analysis provides initial evidence on determinants of the level of derivatives usage. We find differences between characteristics of adopters and characteristics influencing level of derivative activity. We also find differences between characteristics of interest‐rate and foreign‐exchange derivatives users. Level of both interest‐rate and foreign‐exchange derivatives usage is positively associated with multinationality, variance of accounting return on assets, and growth opportunities (proxied by research and development expenditures), and size. Interest‐rate derivatives usage is also positively associated with debt levels. The findings on the adoption decision generally confirm other research. Our findings are consistent with extant theories.

Economic value added: A better measure for performance and compensation?

Economic value added has become increasingly popular as a decision-making tool—especially for measuring performance and compensation. Is it really better than using traditional measures like earnings per share (EPS) or Return on Equity (ROE)?

Relevance of U.S.-GAAP for Japanese Companies

We use differences in U.S. GAAP and Japanese-GAAP accounting measures to evaluate the value-relevance of U.S.-GAAP reports. We show data provided in U.S. GAAP financial statements of Japanese firms is value-relevant beyond that contained in domestic-GAAP statements. Our results complement extant research and support the proposition that U.S. reporting methods provide value-relevant data. Understanding the value-relevance of data from Japanese firms is important in its own right because of the major role these firms play in international markets. We also provide evidence on significant transnational firms that voluntarily provide U.S. GAAP statements.

Derivatives: An update

There has been an explosion of derivatives use in the past few years, and evolving products. But changing disclosure and accounting requirements make this a difficult area for CFOs. The authors give a useful update of current trends and requirements.