In this paper we examine the validity of using one-year-ahead cash flows prediction tests as a substitute for the value relevance test of earnings. We show theoretically that the R2 of the cash flows prediction regression is contaminated by the presence of (1) noise in the cash flows and (2)...

Prior studies have provided a number of possible explanations for delayed market reactions to earnings announcements. However, there has been relatively little effort to predict the magnitude of the post-earnings announcement drift (PEAD). We show that the squared correlation coefficient (p2 )...