The Effect of Firm Size on Predictability Future Cash Flows Using Earnings and Operating Cash Flows

Abstract

The aim of this research is to investigate earnings relative ability, operating cash flow, and two traditional criteria of cash flow, that is, net earnings plus depreciation and operating working capital in predicting operating future cash flows. Further, the effect of firm size on the ability to predict these criteria is investigated in this research. The sample firms contain listed companies in Tehran Stock Exchange (TSE) over the period 2005-2009. The results show that net earnings relative to operating cash flows and its traditional criteria have greater ability to predict future cash flows in small firms whereas operating cash flows compared with other criteria are better predictors in big firms. Results indicate thatthe predictability of all models increases considerably when firm size increases.