Usefulness of Accounting Estimates: A Tale of Two Countries (China and India)

Abstract

This is an exploratory study to examine the quality or usefulness of accounting estimates of companies in China and India over time. Specifically, we examine how well the accounting estimates are able to predict future earnings and cash flows during the period 2003-2013. The results for India indicate that the out-of-sample earnings and cash flow predictions derived are more accurate and more efficient in the more recent period (2010-2013) than the earlier period (2003-2006). In contrast, the out-of-sample earnings and cash flow predictions for China are generally more biased, less accurate, and less efficient. The results indicate abnormal returns earned on hedge portfolios formed on earnings (cash flow) predictions for India in the recent period. In contrast, none of the portfolios for China earn positive returns. The results suggest that the accounting estimates in India in recent years have become better predictors of future earnings and cash flow than accounting estimates in the earlier period. However, the accounting estimates in China are not relevant for predicting earnings and cash flows over the years in the sample period.

Department(s)

Business and Information Technology

Keywords and Phrases

Accounting systems; Cash flows; Earnings; International financial reporting standards; Prediction models

International Standard Serial Number (ISSN)

0148-558X; 2160-4061

Document Type

Article - Journal

Document Version

Citation

File Type

text

Language(s)

English

Rights

© 2017 The Authors, All rights reserved.

Publication Date

01 Jan 2017

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