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The IUP Journal of Accounting Research and Audit Practices:

Earnings and Cash Flow as Predictors of Stock Price: Evidence from Manufacturing Firms

Article Details

Pub. Date	: October, 2023
Product Name	: The IUP Journal of Accounting Research and Audit Practices
Product Type	: Article
Product Code	: IJARAP061023
Author Name	: Minimol M C
Availability	: YES
Subject/Domain	: Finance
Download Format	: PDF Format
No. of Pages	: 19

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Abstract

The paper examines the impact of variables like cash flow from operating activities, net cash inflow or outflow and earnings per share on share price. The study is conducted on a sample of manufacturing companies. The hypothesis identifies the significance of the impact caused by the financial variables on stock price. The methodology used is unit root test, Johansen cointegration test, Vector Error Correction (VEC) and regression. The results prove that the variables are stationary and do not have a trend. Johansen cointegration indicated no long-term relationship between the variables and VEC tests showed no short-term relationship. The variables were also regressed to find closing price and EPS; net cash flow from operating activities has a significant relationship, but net cash inflow or outflow has no significant relationship.

Description

A strong financial market with high participation is necessary for a developing economy. Given Indian economy's burgeoning growth, there is a need to raise resources for companies to fuel the capital needs of the economy. India's household savings, one of the highest in the world at 30%, can be streamlined into equities, bonds and other instruments to accelerate the financial services and improve the financial markets in India. According to Jing et al. (2007), to obtain company valuation, one has to multiply a value driver (such as earnings) of the company by the respective multiple, which is based on the relation of stock price to that value driver for a group of comparable companies. Value drivers include various measures of cash flow, book value, earnings and revenues, but earnings and cash flows are by far the most commonly used.