The Impact of Firm's Specific Attribute to The Relevance of Earnings and Cash Flows In Explaining Stock Return (Study In Food and Beverage Industries Year 1998-2004)

Abstract

The purpose of this study is to test whether there are linier or non linier relationship between stock returns and accounting variables (earnings and cash flows) in Indonesia and how firm - specific attributes such as size firms, debt level, and firm life cycle influence the relative relevance of earnings and cash flows in explaining stock returns. The study uses linier and non linier model to describe the best relationship between dependent variable and independent variables. The regression result supports a linear relationship between stock returns and accounting variables. The non linier relationship model can not increase explanatory power of earnings and cash flows to stock return compare with linier relationship model. The regression result indicates earnings are more relevance for small and large firms than earning changing. While cash flows only give more additional information in large firms but it is not happened in small firms. The result based on debt level indicate that for firms with high debt level and low debt level, earnings are the most relevant accounting variable in explaining stock return, while the cash flows reveal a greater incremental information beyond that contain in earnings for firms with low debt level than high debt level. The regression result based on firm life cycle indicates that the most relevant accounting variable in explaining stock return is earnings. In addition, cash flows reveal greater incremental information beyond that contained in earnings for growth firms than for mature firms.