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Business and Research Method

Do Cash Flows have Impact Toward


the Stock Price in Access,
Competitive and Efficient (ACE)
Market
Dr. Devika Nadarajah
NG SOO KEE
PBS1421704

Introduction

Bursa Malaysia is a Fama-efficient market,


where the share prices will be significantly
affected by disclosure of account earnings.

Bursa Malaysia has operated on two listing


board which are the Main Market and ACE
Market since year 2009.

Problem statement

Insufficient of cash flow may lead to the


financial risk toward the firms.

Cheng, Shamsher and Annuar (2013) stated


that the financial risks are the variables that
significantly affected the share prices for US
market.

However, disclosure of cash flow statement for


several years but the impact toward share
prices is still inconclusive.

Significance of study

There is no evidence to suggest whether cash


flow statement able to be used to predict
returns.

This study is to identify whether the


information on cash flows have any impact
towards the stock prices in ACE market.

Hence, research is to identify whether cash flow


is useful in forecasting the returns of stock.

Research question

Does a high level of aggregate accruals induce


overvaluation of the entire stock market?

How the market liquidity affect asset prices and


welfare?

Is there a relationship between cash flow and


stock prices?

Can investor use the cash flow volatility to


predict returns?

Literature summary / gap

According to Ali (1994), cash flows have no


incremental information value beyond the working
capital and earnings.

In contrast, Cheng, Chao and Scharfer (1996) shown


that both the earnings and cash flows from
operation have a significant incremental information
content.

In the study of Paresh and Joakim (2014) shown that


the cash flow and cash flow volatility are
significantly correlated with returns.

Theoretical framework

This research is to identify whether changes in


cash flows have the informational content.

In addition, it is also study whether cash flows have


the incremental informational content beyond
accounting earnings data in relation to company
share prices.

Research design

The data will be tested with descriptive statistic and regression


analysis for cumulative abnormal return (CAR), standardized
unexpected earnings (SUE) and standardized unexpected cash flow
from operation (SUCFO).

The hypothesis in this study is changes in cash flows have


information content beyond earnings.

H1: Cash flows have no informational content


H2: Cash flows have no incremental informational content beyond
accounting earnings data in relation to company share prices.

The null will be accepted if there is no significant relation between


stock price changes and unexpected cash flows changes but
significant relation between stock price changes and unexpected
earnings changes.

Plan for data analysis

1.
2.
3.
4.
5.

The data set was made from the daily closing prices and
earnings/cash flow information through:
Bursa Malaysia Securities Clearing Sdn Bhd
Bursa Malaysia Annual Company Handbooks
Investors Digests
KLSE Daily Diary
Bursa Malaysia Library

30 companies chosen should be local companies and Malaysiandomiciled from ACE market.

The stock price will be converted into daily and monthly return
and scrutinized for error by using filter test

Pilot study results

Limitation, recommendation,
conclusion

Stock returns are significantly affected by the earnings of


the company and portfolio levels over long window
interval.

Hence, earnings have the incremental


content beyond cash flow in ACE market.

However, during the short window test, investors will


value the share based on earnings and cash flow
simultaneously.

Therefore, cash flow does have incremental information


content beyond earnings during the short window.

information

References
Ali, A. (1994). The Incremental Informational Content of Earnings,
Working Capital from Operations, and Cash Flows. Journal of
Accounting Research 32(1): 61-74.
Cheng C. S. A., Chao S. L. & Schaefer T. F. (1996). Earnings
Permanence and the Incremental Information Content of Cash
Flows from Operations. Journal of Accounting Research, 34 (1),
175-181.
Cheng, F. F., Shamsher, M., & Nassir, A. (2013). Effect of Risks on
Earnings and the US Bank Share Valuation.Pertanika Journal Social
Sciences & Humanities 21(S): 19-30.
Paresh K. N. & Joakim W. (2014). Does cash Flow Predict Returns?
International Review of Financial Analysis 35: 230-236