This study examines the ability of current cash flows and earnings to predict future cash flows in the Indian stock market. A total of 14,739 firm-year observations from non-financial firms listed on the Bombay Stock Exchange (BSE) from 2002 to 2014 were used. The regression models, as propounded by Dechow, Kothari and Watts (1998), were employed to assess the predictive ability of current cash flows and earnings to forecast future cash flows and their trends over time. The results reveal that both current cash flows and earnings are strong predictors of future cash flows. Additionally, the findings of the study demonstrate that current cash flows outperform earnings in predicting future cash flows of an entity. Moreover, the findings show that the linear trend of the incremental explanatory power of cash flows in predicting future cash flows increased over the sample period, while the incremental ability of earnings to predict future cash flows declined over the same time. Furthermore, the findings disclose that the non-linear incremental explanatory power of current cash flows increased over the sample period. In general, the findings of this study suggest that current cash flows are better predictors of future cash flows than earnings. Hence, the use of current cash flows to forecast future cash flows is recommended. The results provide essential information to investors, analysts and other capital market participants regarding the role of current cash flows and earnings in predicting future cash flows.
Current cash flows, earnings, future cash flows