Electronic copy available at: http://ssrn.

com/abstract=2472571
Are Cash Flows Better Stock Return Predictors Than Prots?
Stephen Foerster, Ivey Business School, Western University*
John Tsagarelis, Primes Corp. Grant Wang,
Highstreet Asset Management Inc.
August 6, 2014
Abstract
Novy-Marx (2013) shows that protability, measured by gross prots-to-assets, predicts
the cross-section of average returns just as well as book-to-market ratios do. We nd
that, in our 1994-2013 sample of S&P 1500 stocks, cash ow measures are even better
predictors of stock returns than various income statement-based measures. We present
a procedure for transforming indirect cash ow method statements into disaggregated
and more direct estimates of cash ows from operations and other sources. We then
derive direct method cash ow measures and form portfolio deciles based on these
measures. Stocks in the highest cash ow decile outperform those in the lowest cash
ow decile by over 10% annually after controlling for well-known risk factors. Our
results are robust to the investment horizon, and controlling for sector dierences. We
also show that, in addition to operating cash ow information, cash taxes and capital
expenditures provide incremental predictive power.
JEL Codes: G10, G14
Keywords: direct cash ow method; cash ows; stock return predictability

* Corresponding author. Ivey Business School, Western University, 1255 Western

Road, London, ON N6G 0N1, (519) 661-3726, sfoerster@ivey.ca. We wish to thank
Matthias Hanauer, Darren Henderson, Rick Robertson and seminar participants at
Western University for helpful comments and suggestions. All errors remain our own
responsibility.
Electronic copy available at: http://ssrn.com/abstract=2472571
1 Introduction
Investors rely on nancial information, such as protability and cash-related measures, to
assess a rms intrinsic equity value and predict the cross-section of average returns. Fama
and French (2006) nd that more protable rms have higher expected returns. Novy-
Marx (2013) shows that protability, measured by gross prots-to-assets, predicts the cross-
section of average returns just as well as book-to-market ratios do. Fama and French (2013)
incorporate the protability measure as a new factor, extending their well-known three-factor
model. Ball et al. (2014) show that an operating protability measure that better matches
current expenses and revenues is an even better predictor of returns and also show that
results depend on whether the denominator is total assets or the market value of equity.
Thus the search continues for nancial information that better predicts stock returns.
While the income statement has long been at the center of nancial statement analysis,
well-documented shortcomings
1
and the recent studies such as Ball et al. (2014) show that
not all components of the income statement have the same predictive power. Notorious
bankruptcies including Enron and WorldCom, graphically illustrate that protable GAAP
income statements can simultaneously co-exist with negative operating or free cash ow for
the same company (see Appendix A for an example). Novy-Marxs (2013) intuition that
the farther down the income statement one goes, the more polluted protability measures
become and less related to true or economic protability certainly rings true. Yet it is not
obvious that any accounting prot measures, regardless of where on the income statement
it appears, should be superior to cash-based measures of protability. This friction between
accrual earnings and cash ows has spawned considerable academic interest in the eld of
quality of earnings
2
and has contributed to investors renewed interest in cash ow related
1
See Sloan (1996) and Markham (2006). See also more generally, American Institute of Certied Public
Accountants (1973). The committee, chaired by Robert Trueblood, urged the accounting profession to
be more responsive to investors and creditors in providing information about the companies they audited.
This was in reaction to the Securities and Exchange Committees (SEC) growing pressure on accountants
to forsake management and serve new constituencies of investors, creditors, rating agencies, analysts and
anyone else with an interest in a companys nancial statements.
2
See OGlove (1987), Kellogg and Kellogg (1991) and Siegel (1991).
1
measures. However, it is unclear how the common indirect cash ow statement
3
should be
used: should investors focus on operating cash ows? Free cash ows? Pre-tax or post-
interest costs? Investors frustration with both the income statement and the indirect cash
ow statement has inspired periodic reviews by the International Accounting Standards
Board (IASB) and the U.S. Financial Accounting Standard Boards (FASB).
4
While the
FASB (2008b) study provides a series of far reaching insights and highlighted the potential
benets of disaggregating nancial information using a direct cash ow methodology, it fails
to outline how these techniques can be used today and provides no evidence of their ecacy.
Our study attempts to ll that void.
Our main nding is that direct cash ow measures are generally better stock return
predictors than indirect cash ow measures, which in turn tend to be better than various
income statement protability measures that focus on either gross prots, operating prots,
or net income. We rst outline a systematic process for combining existing income and
cash ow statements to generate a direct cash ow approximation. That is, we create a
new statement that disaggregates operating, nancing, tax, and non-operating cash ows
to isolate recurring value creation activities. We then create a series of cash-based nancial
ratios and compare them to Ball et al.s (2014) operating protability measure, Novy-Marxs
(2013) gross protability measure, as well as the traditional return on assets (ROA)
5
measure,
all of which have total assets in the denominator. Consistent with Ball et al. (2014), we
repeat our analysis using market value of equity as the denominator. We show that our
new measures generate greater risk-adjusted returns than those based on standard income
statement information. Our results are robust across investment horizons and risk factors
3
See Goyal (2004), who estimates that 97% of rms use the indirect rather than direct method. Anecdo-
tally, the current number is probably close to 100%.
4
The accounting standard for presenting the statement of cash ows is documented in the Financial
Accounting Standards Board (FASB) (1987), known simply as FASB 95 or FAS 95. In particular, see page
6 that states The information provided in a statement of cash ows...should help investors...to assess the
enterprises ability to generate positive future net cash ows. See also FASB (2008b) for a discussion paper
on proposed changes in the standard. For an overview of the proposed changes see Reilly (2007).
5
In unreported results we repeat our analysis with return on capital measures as well as the traditional
return on equity measure. The results are qualitatively the same.
2
including controlling for sector dierences.
While the intrinsic value of a rm is the present value of future cash ows, there are many
proxies for future cash ows.
6
Variation and inconsistency in nancial statement presentation
formats creates diculties for investors who wish to understand what to extrapolate and to
analyze how sustainable the value creating activities are. While FASB specically endorses
the accrual accounting system, we believe accrual accounting
7
also creates many potential
forecasting problems for investors. A key aspect of the accrual system is its ability to smooth
out temporary uctuations in cash ows (e.g., see Dechow (1994) and Dechow, Kothari and
Watts (1998)). The contrast between cash basis reporting and earnings reported under the
accrual system is highlighted in FASB (2008b, p. 9): [Accrual accounting recognizes that]
the buying, producing, selling, and other operations of an entity during a period, as well as
changes in fair value and other events that aect its economic resources and claims to them,
often do not coincide with the cash receipts and payments of that period. The accrual
system, therefore, implicitly assumes that by recognizing economic events independent of
the timing of the underlying cash ows, users can rely on the income statement as an
unbiased decision predictor. For example, an increase in accounts receivable stemming from a
customers delayed payment (which simultaneously reduces cash ows and increases accruals
by the same amount) leaves both revenues and net income unchanged as if full payment
was received. While FASB sees accruals as improving the ability of earnings to measure rm
performance,
8
we can also view the lack of cash inows from the tardy customer and the
resulting dierences in accrual and cash statements as creating the potential for securities
mispricings. More generally, research suggests earnings targets inuence accounting decisions
6
As FASB (2008b, p. 3) outlines in their discussion paper, Transactions or events recognized in nancial
statements today are not described or classied in the same way in each of the statements...That makes it
dicult...for users who want to assess the quality of an entitys earnings by comparing operating income
with operating cash ows.
7
The term accrual is used in a general sense and includes both accruals and deferrals.
8
See FASB (2008a) at paragraph 44: Information about enterprise earnings and its components measured
by accrual accounting generally provides a better indication of enterprise performance that does information
about current cash receipts and payments.
3
thereby creating strong incentives to bias accruals either upward or downward.
9
This pattern
of persistent timing dierences between the two statements that fails to converge is not
uncommon.
10
In an eort to improve the usefulness of information both the IASB and FASB undertook
a detailed study to explore how the presentation of nancial information can be modied
to meet investors needs. While FASB encourages rms to report cash ows using the
direct cash ow method (DCFM), very few rms actually do. In the FASB (2008b) exposure
draft, the IASB and FASB examined using the DCFM to measure a companys operating
performance rather than the commonly used indirect method that starts with net income
and makes adjustments. According to FASB (2008b, p. 45) the indirect approach includes a
major deciency: it derives the net cash ow from operating activities without separately
presenting any of the operating cash receipts and payments. Additionally, it merely recon-
ciles information and is not a valid substitute for operating cash inows and outows. Under
the DCFM, cash ows are segregated between cash receipts from customers less cash pay-
ments to suppliers, nancing activities, tax impacts and other non-recurring, non-operational
activities (see Appendix A for an example of the indirect and direct cash ow methods). The
motivation for this compartmentalization is to isolate recurring cash ows from business ac-
tivities that are additive to net present value, segregate nancing activities that are not and
ag on-o gains or losses.
11
As Lee (2014) notes, information that is useful in forecasting
future residual income (i.e., above a normal rate of return) is the type of information
that directs investor attention to the sustainability of future cash ows, which requires more
normalized measures of performance.
It is our belief that segregating cash ows into their common underlying economic factors
9
See Graham, Harvey and Rajgopal (2005) and regarding abnormal accruals see Healy and Wahlen (1999).
10
For example, we investigated the U.S. railway industry. Between 1993 and 2012, reported trailing four-
quarter net income consistently and persistently exceeded trailing four-quarter free cash ows for each of
CSX Corp., Norfolk Southern Corp. and Union Pacic Corp.
11
See Esplin et al. (2014). See also, Nissim and Penman (2001), Faireld and Yohn (2001), Soliman (2008),
and Faireld, Kitching and Tang (2009). Also, many nancial statement analysis textbooks recommend
the operating/nancial disaggregation for protability forecasting and rm valuation: see Penman (2013),
Lundholm and Sloan (2006).
4
permits investors to better understand and model the magnitude, frequency, timing and
volatility of recurring cash ows. Unfortunately, the cost of preparing cash ow statements
under the DCFM and the hesitancy by rms to reveal the information provided by them has
resulted in very few companies adopting this approach, despite the FASBs encouragement.
Accordingly, there is very little research linking the DCFM and future stock returns.
12
Our
study attempts to ll this gap by creating a proxy for DCFM statements from existing
nancial statements and testing their ecacy as it relates to predicting future stock returns.
Our study lends support to the IASBs and FASBs initiatives to require a direct method
nancial reporting regime.
Our research is most closely related to and extends the work of Novy-Marx (2013) and
Ball et al. (2014). While Novy-Marx (2013) argues that gross protability is the cleanest
accounting measure of true economic protability, and Ball et al. (2014) derive an improved
operating protability measure, we argue that even cleaner measures can be derived by
focusing on the cash ow statement and cash-related items: we focus on cash-related mea-
sures that better reect cash that is available to equity holders.
13
We empirically test the
relationship between DCFM-based cash ow estimates and future stock returns in the U.S.
equity market in order to test our conjecture that disaggregated direct cash ows permit
investors to isolate recurring from non-recurring value adding activities, leading to superior
return predictions. First, we provide a template to show how DCFM cash ows can be esti-
mated from income statements and indirect cash ow statements by segregating cash ows
from operating activities, nancing activities, taxes, and other non-operating activities. Sec-
12
Krishnan and Largay (2000) examine the usefulness of direct method cash ow information and the
extent to which this information is more benecial in predicting future operating cash ows compared with
the indirect method. Orpurt and Zang (2009) report evidence that suggests market participants utilize direct
method disclosures to better forecast future operating performance. Farshadfar and Monem (2013) examine
data from Australia from 1992 to 2004 and nd that the cash ow components as reported in the DCFM
have a greater ability to predict future cash ows as compared with an aggregate cash ow measure.
13
Our work also complements previous studies that investigate cash ows and investments (e.g., Lakon-
ishok, Shleifer, and Vishny (1994), Hackel, Livnat, and Ra (1994), Hackel and Livnat (1991)); accruals and
investments (e.g., Sloan (1996), Xie (2001), DeFond and Park (2001), Thomas and Zhang (2002), Richard-
son, Sloan, Soliman, and Tuna (2005), and Livnat and Santicchia (2006)); and cash ows, accruals, and
investments (e.g., Houge and Loughran (2000), and Livnat and Lopez-Espinosa (2008)).
5
ond, we construct new protability measures based on various estimates of cash ows from
operations less capital expenditures, adjusted for nancing and taxes. Consistent with Ball
at al. (2014), we use both total assets and market value of equity in the denominator of these
ratios. These ratios are compared with Novy-Marxs (2013) gross protability measure, Ball
et al.s (2014) operating protability measure, and traditional return on assets as well as
earnings-to-price (EP) and related market value of equity-based measures. We nd a signif-
icant positive relationship between the derived cash-based ratios and future stock returns as
measured by high-low portfolio returns, information ratios, and risk-adjusted alphas. Stocks
in the highest cash ow decile outperform those in the lowest cash ow decile by over 10%
annually after controlling for well-known risk factors. In contrast, other protability and
earnings-based ratios generally have relatively weaker relationships with future returns in
our sample of S&P 1500 stocks in the 1994 to 2013 period. We also show that, in addition
to operating cash ow information, cash taxes and capital expenditures information provide
incremental predictive power.
The remainder of the paper is organized as follows. Section 2 presents our direct method
cash ow template that segregates cash from operations, nancing, taxes, and other. Section
3 describes our data and methodology. Sections 4 and 5 present our main results while section
6 presents robustness checks. Section 7 investigates cash ow components and section 8
concludes.
2 The Direct Cash Flow Template
As an alternative to the traditional income and cash ow statements we propose the following
direct cash ow template and an alternative set of cash-based capital eciency and valuation
ratios. Unlike the indirect approach that begins with net income and reconciles to operating
cash ows by reversing non-cash activities, the direct cash ow template adheres to the
culinary principle of mise en place. That is, we organize and sort nancial information
6
into clusters of homogeneous business activities thereby permitting the reader to understand
how value is being created and what can be extrapolated. In this way, operating activities
associated with a competitive advantage are value enhancing and are likely to repeat, while
nancing activities are not. Tax structures and other non-operating activities may be value
enhancing attributes but are likely unsustainable. This overview is consistent with earlier
studies that demonstrated that cash-based component of earnings are more persistent and
therefore are of higher quality than accrual based components (Sloan (1996)).
While we recognize that this template does not generate the actual direct cash ows
as envisioned by FASB (2008b) (since corporations are not required to publish segregated
operating from non-operating cash ows) we nevertheless feel it provides an improved method
over non-transformed accounting data for estimating intrinsic values. While all the individual
components of the cash ows are publicly available, we conjecture that their availability
alone does not ensure it is integrated in a timely manner and used by investors to estimate
intrinsic values. Patterns must be isolated, revealed and applied before stock prices reect
this information. Our analysis also highlights what types of information are most informative.
The direct cash ow template we use is presented in Table 1 and is summarized as follows.
We rst directly estimate net cash ows from operating activities. We begin with the main
cash inow of sales, adjusted for changes in accounts receivable, deferred revenues, and other
cash inows from operations. We subtract cost of goods sold as well as selling, general, and
administrative expenses, then adjust for changes in accounts payable from operations and
changes in inventories. The result is our estimate of Net Cash Flows from Operations (A).
Next we estimate Net Cash Flows from Operations After Financing Activities (B) by
subtracting interest expenses and adjusting for other nancing income or expenses. We
then estimate Net Cash Flows from Operations After Financing and Tax Activities (C) by
subtracting cash ows related to tax activitiesincluding taxes on the income statement,
adjusted for changes in account payable taxes and deferred taxes. Finally, we estimate
Net Cash Flows from Operations After Financing, Tax, and Extraordinary Activities (D)
7
by accounting for other non-operating activities, including discontinued operations, foreign
exchange, and pension-related items. For completeness, in order to reconcile this cash ow
estimate with the traditional Free Cash Flows to Equity Holders, we account for cash ows
from investing activities. Here we simply subtract the cash outows associated with capital
expenditures.
3 Data and Methodology
The fundamental and pricing data come from Standard & Poors Xpressfeed North American
database (Xpressfeed). The investment universe is the S&P 1500 which consists of the largest
500 stocks by market capitalization, the mid-cap 400, and small-cap 600. The choice of S&P
1500 ensures that these stocks are truly investable and the tested investment strategies
are more relevant to practitioners. The historical S&P 1500 constituents also comes from
Xpressfeed. Each month we obtain a list of stocks included in S&P 1500 at that time, thus
preventing any survivorship bias. As is common in studies that rely on accounting metrics,
and given some major structural dierences between nancial and non-nancial rms, for
most of our reported analysis we exclude nancial rms from our sample (including banks,
insurance rms, and REITs), on average, about 15% of the sample. We use data from
October 1994 to December 2013 as cash ow statements only became mandatory in the
U.S. since 1987, and actual index constituents for the S&P 1500 only become available since
October 1994.
The major fundamental variables used in this study are: operating activities-net cash ow
(Xpressfeed mnemonic OANCF), net sales (SALE), accounts receivable decrease/increase
(RECCH), cost of goods sold (COGS), selling, general and administrative expense (XSGA),
depreciation and amortization income statement (DP), depreciation and amortization cash
ow statement (DPC), funds from operations other (FOPO), accounts payable and accrued
liabilities - increase/decrease (APALCH), inventory decrease/increase (INVCH), assets
8
and liabilities other net change (AOLOCH), sale of property, plant and equipment and
investments gain/loss (SPPIV), interest and related expense total (XINT), income taxes
total (TXT), income taxes accrued increase/decrease (TXACH), deferred taxes cash
ow (TXDC), special items (SPI), discontinued operations (DO), extraordinary items (XI),
capital expenditure (CAPX) and income before extraordinary items available for common
(IBCOM). Following industry practice, we create trailing twelve month (TTM) values for the
fundamental variables. These TTM values are updated with each quarters new information
and are combined with monthly returns data to conduct the tests. Despite having quarterly
updates and to avoid any look-ahead biases, we only use accounting data that has been
lagged by four months.
14
Table 2 presents summary statistics for the fundamental variables for companies that are
in the S&P 1500 at any time during our sample period. There are 164,385 company-quarter
total observations from 1992 to 2013. Mean (median) net sales are $4,352 million ($914m);
net cash ows from operating activities are $513m ($81m); capital expenditures are $287m
($40m); and income before extraordinary items available for common shareholders are $237m
($36m).
Based on our template denitions in Table 1, we create various direct and indirect free
cash ow measures. FCF AFAT represents net cash ows from operations after nancing
and tax activities (C) - capex; FCF AF represents net cash ows from operations after
nancing activities (B) - capex; and FCF O represents net cash ows from operations (A) -
capex. These direct cash ow measures (DCFM) are compared with the indirect cash ow
measure FCF IM dened as operating activities net cash ow (OANCF) - capex. Note that
this indirect measure, OANCF, results in the same number as net cash ows from operations
after nancing, tax, and extraordinary activities, (D) in Table 1.
These free cash ow denitions are then used to construct various cash returns on assets
and free cash ow yield metrics. The variable CFAFAT/TA is the cash return on assets
14
The four month lag is conservative. In our un-tabulated analysis of S&P 1500 rms between 1993 and
2013, 99% of these rms led 10-Q statements within three months after the quarter end.
9
measured as the free cash ow direct method measure FCF AFAT divided by total assets.
The variables CFAT/TA, CFO/TA, and CFIM/TA are alternative return on assets measures
that have as the numerator FCF AT, FCF O, and FCF IM, respectively. We compare these
measures to a number of accounting-based measures. The operating prot measure, OP/TA,
has as the numerator operating prots (as estimated by Ball et al., 2014, subtracting from
sales the cost of goods sold and selling, general & administrative costs excluding research &
development) and total assets as the denominator. Novy-Marxs (2013) gross prot to total
assets, GP/TA, has as the numerator gross prot as measured as sales less cost of goods sold.
The traditional return on assets ratio is measured as IBCOM (income before extraordinary
items available for common shareholders) divided by total assets. The price yield measures
are similar to the measures just described expect total assets are replaced by the market
value of equity (MVE) in the denominator. Note that the traditional earnings yield, or the
inverse of the price-to-earnings ratio, EP, is measured as IBCOM or net income divided by
the market value of equity, and is noted simply as NI/MVE.
Each month, we rank the S&P 1500 rms by a particular return on asset or yield measure
and divide the universe into deciles from low (P1) to high (P10). One-month-ahead portfolio
returns are calculated on a value-weighted basis and equal-weighted basis (we also consider
other horizons). In standard fashion, a long-short portfolio return is estimated as the spread
return dierence between the highest (P10) and lowest (P1) portfolio returns. We then test
for the signicance of the return dierences.
4 Cash Flow and Protability Return and Yield Mea-
sures and One-Month-Ahead Returns
Table 3 presents results comparing the one-month-ahead returns for the various portfolios
(P1 through P10), as well as the P10-P1 high-low portfolio return spread, sorted on the
basis of the previous months return on assets or yield measure, for the entire October
1994 to December 2013 period. We also show the standard deviation of the P10-P1 return
10
measure, the t-statistic of the signicance of the P10-P1 return, the minimum and maximum
monthly P10-P1 observations, and the information ratio (IR) measured as the annualized
P10-P1 return divided by the annualized standard deviation of the return dierence. Panel A
presents results measured by value-weighted returns.
15
Not surprisingly, across all measures
there is a general (but not perfect) monotonic relationship, with higher measures tending to
exhibit higher one-month-ahead returns than lower measures.
Panel A presents results based on value-weighted returns. The upper part of the panel
presents measures with total assets in the denominator. Returns generally increase somewhat
monotonically across the low to high portfolios for the various measures. We see that the
Novey-Marx (2013) GP/TA variable has the largest P10 return among the return on asset
variables but not the biggest P10-P1 spread since many of the cash ow measures have
more cross-sectional variation. For the portfolios sorted on the basis of our three DCFM
eciency measures (CFAFAT/TA, CFAF/TA and CFO/TA) the high-low (P10-P1) return
dierences are signicantly positive (t-statistics ranging from 2.14 to 2.73), with monthly
return dierences ranging from 0.64% to 0.82% (or equivalently 8.0% to 10.3% annually).
Information ratios range from 0.489 to 0.623. For the indirect method cash ow return
measure (CFIM/TA), the high-low monthly return dierence drops to 0.49% (6.0% annually)
but not signicant, and the information ratio drops to 0.356. The return dierence for the
portfolios sorted on the basis of operating prots-to-total assets (OP/TA) is very similar to
that based on the CFIM/TA variable at 0.49% (6.0% annually) and not signicant and with
a similar information ratio of 0.356. The high-low portfolio returns based on the gross prot-
to-total assets (GP/TA) measure is also similar at 0.49% (6.1% annually), but given the lower
standard deviation of returns is signicant (t-statistic of 2.10); additionally, the information
ratio is higher at 0.480. Finally, for the return on assets (NI/TA) measure, the monthly high-
low return dierence is only 0.06% (0.7% annually) and is not signicantly dierent from
zero and the information ratio drops to 0.040. Among these cash ow return measures, the
15
We also repeat our analysis including nancial rms and results are substantively similar.
11
best performing high-low portfolio is based on the sorting using the FCF DM AF measured
(net cash ows from operations after nancing activities (B in Table 1) less capex). This
same measure also has the highest information ratio.
The lower part of the panel presents measures with market value of equity in the de-
nominator. We also see that all of the return dierences for the portfolios sorted on the
basis of our three direct method cash ow yield measures (CFAFAT/MVE, CFAT/MVE
and CFO/MVE) as well as the indirect method cash ow return measure (CFIM/MVE)
are signicantly positive (t-statistics ranging from 1.91 to 3.03), with monthly return dier-
ences ranging from 0.55% to 0.77% (or 6.9% to 9.6% annually). Information ratios range
from 0.436 to 0.692. The return dierence for the portfolios sorted on operating prot yield
(OP/MVE) is 0.70% (8.7% annually) and marginally signicant, while the information ratio
is lower at 0.380. For the gross prot yield (GP/MVE), the high-low return dierence is
0.58% (7.2% annually) but not signicant and the information ratio drops to 0.313. Finally,
for the earnings yield measure (NI/MVE), the monthly high-low return dierence is 0.43%
(5.2% annually) and is not signicant, and the information ratio is only 0.271. Among these
cash ow return measures, the best performing long-short portfolio is again based on the
sorting using CFAF/MVE (net cash ows from operations after nancing (B in Table 1)
less capex) and generates the highest information ratio. The AFAT and AF DCFM measure
sortings result in higher information ratios than for the indirect cash ow measure sorting
(CFIM/MVE).
Table 3, Panel B presents results based on equal-weighted returns. Recall that since
our sample includes the largest and generally most liquid U.S. stocks (i.e., the top 1500,
less nancial rms), it makes sense to consider equal-weighted returns in addition to the
previously reported value-weighted return results. In general the results are similar to those
in Panel A with the cash ow measures stronger than protability-related measures. For the
return on asset measures in the upper part of the panel, based on high-low return dierences,
we note a monotonic relationship, with all three of the DCFM measures dominating the
12
indirect method measure and all of the cash ow measures dominating the OP and GP
measures and the net income measure. The largest high-low monthly return dierence of
0.69% (8.6% annually) is for the CFAFAT/TA variable. All of the cash ow measures are
signicant (t-statistics from 2.47 to 3.65] while all of the protability measures are not
statistically signicant. We note the same monotonic relationship based on the information
ratio.
For the cash ow yield measures in the lower part of Panel B, the story is again very
similar. The CFAFAT/MVE and CFAF/MVE dominate the indirect method measure and
all dominate the OP and GP measures and the traditional earnings yield measure, although
the operating prot high-low return dierence is signicant while return dierences based
on the gross prot measure is marginally signicant. Again we note the same monotonic
relationship based on the information ratio.
Thus for our sample, before we adjust for risk factors (i.e., in our regression analysis
below), we dont see the dierences within the panels highlighted by Ball et al. (2014):
the total asset versus market value of equity denominator or deator doesnt appear to
substantively impact the results.
In un-tabulated results, we also perform dierence of means t-tests of the P10-P1 high-low
return dierences for various DCFM measures compared with indirect method measures and
protability measures. For the value-weighted return results, the CFAFAT/TA sorted return
dierences are signicantly greater than the NI/TA returns; and both the CFAT/TA and
CFO/TA returns are signicantly greater than both the CFIM/TA and NI/TA returns. For
the equal-weighted return results, each of the CFAFAT/TA, CFAT/TA and CFO/TA sorted
return dierences are signicantly greater than the both the GP/TA and NI/TA returns; and
each of the CFAFAT/MVE, CFAT/MVE and CFO/MVE returns are signicantly greater
than the NI/MVE returns.
We also divide the test periods into four sub-periods, chosen as follows: sub-period 1,
October 1994 to February 2000 (65 months), coincides with the technology bubble period;
13
sub-period 2, March 2000 to July 2007 (89 months), coincides with the post-technology
bubble and pre-nancial crisis period; sub-period 3, August 2007 to May 2009 (22 months),
coincides with the nancial crisis period; and nally sub-period 4, June 2009 to December
2013 (55 months), coincides with the post-nancial crisis period. We report these sub-period
results in Table 4 Panel A, B, C, and D, respectively.
In Panel A, the technology bubble, results are generally consistent with the overall results,
particularly for the cash ow return measures where the most signicant measure is based
on the CFAFAT/TA measure followed by the CFAF/TA measure and then the third direct
method CFO/TA measure. The indirect method measure, CFIM/TA, is also signicant but
has a lower information ratio, as do the OP/TA and GP/TA measures. The NI/TA measure
is not signicant. None of the yield measure return dierences are signicantly positive but
the cash ow yields are positive while the OP/MVE is negative but not signicant and the
GP/MVE and NI/MVE measures are signicantly negative. In retrospect it is not surprising
that the yield measures, with stock price as the denominator, did not appear to be related
to future stock returns given the high valuations during this period.
In Panel B the results for the period between the technology bubble and the nancial
crisis, while the CFAFAT/TA measure information ratio is not signicant, the other two
direct method cash ow return measures, CFAF/TA and CFO/TA are signicant. None
of the other return on asset measure return dierences are signicantly dierent from zero.
The yield measure return dierences are all signicant and the CFAF/TA measure slightly
dominates all of the other measures in terms of the information ratio.
In Panel C we see the results for the nancial crisis period. For the cash ow return mea-
sures, CFAFAT/TA and CFAF/TA return dierences are marginally signicant although the
OP/TA and GP/TA measures dominate. The NI/TA measure is negative but not signi-
cant. For the yield measures the CFAFAT/MVE measure has the largest information ratio
measure and is the only one that is signicantly positive. What may be partially driving
some of the weaker results is the major failure of quantitative models in August 2007, as
14
described and explained in Khandani and Lo (2007). In addition, in retrospect given the
unprecedented events including the failure of Lehman Brothers and near-failures of other
major nancial institutions, market participants may have overreacted and prices may have
diverged from true intrinsic values.
Finally, in Panel D, in the post-nancial crisis period, we seemed to have returned to more
normal times. The CFAFAT/TA cash ow return measure has the highest information
ratio and the return dierence is signicant. Most of the other measure return dierences are
not signicant, perhaps due to the relative shortness of the sub-period, while the traditional
NI/TA measure is signicantly negative. All of the direct method cash ow yield measures
as well as the indirect method measure return dierences are statistically signicant. The
OP/TA the GP/TA measure return dierences are not signicant, while the traditional
NI/TA measure return dierence is negative and signicant.
Overall we note that the yield measures, based on market values in the denominator, tend
to do better in normal markets such as sub-periods 2 and 4, while the return measures,
with book values in the denominator tend to do better in abnormal markets, particularly in
the frothy sub-period 1 technology bubble period. We also conclude that relying on cash ow
related metrics is a worthwhile endeavor and direct method measures, particularly AFAT,
are generally superior to the indirect method and the traditional measures generally have
very little predictive power.
It is worthwhile to highlight the dierences, so far, between our results and Novy-Marx
(2013) who concludes that protability measures are superior to cash ow measures as pre-
dictors of stock returns (we compare our regression results to his in the next section). First,
given our data limitations, we focus on a shorter and more recent period, 1994 to 2013, com-
pared to his 1963 to 2010 study. It is possible that the protability measure has weakened
more recently. Second, our sample of stocks are dierent. He uses the universe of Compus-
tat stocks (excluding nancials) while we focus on the largest 1500 stocks, which is a more
liquid and tradable sample. Third, our focus is on portfolio performance while he initially
15
emphasizes Fama and MacBeth (1973) regression results (his Table 1) with winsorized in-
dependent variables. As he points out, the methodology weights each observation equally
and thus puts tremendous weight on small or nano/micro stocks that make up two-thirds
of the sample but less than 6% by market capitalization weight (see also Fama and French
(2006)).
16
Fourth, he utilizes an estimate of free cash ows that diers from our approach.
He denes free cash ow as net income plus depreciation less working capital change less
capital expenditures. Interestingly, in Appendix Table A2, his EBITDA-to-assets variable-
most similar to some of our direct cash ow method measures except it does not account for
capital expendituresperforms well and better than his free cash ow measure.
5 Portfolio Sorted Regressions
We adjust for risk in a more systematic manner by using the P1 through P10 portfolio returns
as well as the P10-P1 return spread (i.e., the portfolios sorted on either the return on asset
or yield variables) to run regressions against well-known risk factors. We use monthly data
for the entire October 1994 to December 2013 sample period. Our regression model is:
P
i,t+1
=
i
+
1i
MKTRF
t
+
2i
SMB
t
+
3i
HML
t
+
4i
UMD
t
+
5i
LIQ
t
+
i,t+1
, t = 1, ..., N (1)
The dependent variables are the individual decile portfolios, P1 (low) through P10 (high),
as well as the P10-P1 portfolio return dierence for the various return on asset and yield
sorted portfolio measures, i, in Table 3, for each monthly time series. Most of the independent
variables are based on Carharts (1997) extension of the Fama-French (1993) three-factor
model where MKTRF is the market risk premium (market return in excess of the risk-
free rate), SMB is the small minus big (size) factor, HML is the high minus low (book-
to-market) factor, and UMD is the up minus down (price momentum) factor. We also
16
See also Fama and French (2008) for a discussion of the advantages and disadvantages of the Fama-
MacBeth approach compared to sorting returns.
16
include LIQ, Pastor and Stambaughs (2003) traded liquidity factor, derived from dividing
U.S. common stocks into ten portfolios based on each stocks sensitivity to the non-traded
liquidity innovation factorthe return on the portfolio of high liquidity betas less the return
on the portfolio of low liquidity betas.
17
Once we control for all of these risk factors, the
intercept, , is interpreted as the alpha or abnormal return. If alpha is positive and signicant
it implies the other factors cant be combined to form a mean-variance ecient portfolio and
it suggests how an investor can tilt their portfolio toward a more protability strategy,
such as investing in portfolios that have recently generated high cash ows relative to their
total assets or market value of equity. We use Whites (1980) heteroscedasticity-consistent
standard errors. For comparison we present the average monthly return measured in excess
of the monthly Treasury bill (from Ken Frenchs website).
Table 5 summarizes the regression results. Panel A presents the regression results, with
value-weighted returns, for the P1 (low) portfolio sorted on the various return and yield
measures. Panel B presents regression results, with value-weighted returns, alphas-only, for
portfolios 2 through 9. Panel C presents the regression results, with value-weighted returns,
for the P10 (high) portfolio sorted on the various return and yield measures. Panel D presents
the regression results, with value-weighted returns, for the P10-P1 portfolio return dierence
sorted on the various return and yield measures. Finally, Panel D presents the regression
results, with equal-weighted returns, for the P10-P1 portfolio return dierence sorted on the
various return and yield measures.
Across the panels we see that the portfolio alphas (as well as the average returns) generally
tend to increase as we move from P1 through P10 for the various return on asset and
yield measures. In Panel A for the P1 (value-weighted return) results, most of the alphas
are negative but not signicant; in Panel B (value-weighted return) all of the alphas are
signicantly positive for portfolios P7 through P9; while in Panel C for the P10 (value-
17
Data for the rst four factors are available from Ken Frenchs website http://mba.
tuck.dartmouth.edu/pages/faculty/ken.french/data library.html while the liquidity factor is available from
Lubos Pastors website http://faculty.chicagobooth.edu/lubos.pastor/research/liq data 1962 2011.text.
17
weighted return) results the alphas are also all positive and signicant. Consistent with our
results in Table 3, in both Panel D (value-weighted returns) and Panel E (equal-weighted
returns), all of the three DCFM cash ow based return and yield measure P10-P1 return
dierences are signicantly positive; the indirect measure return dierences are positive and
in most cases signicant; the OP return dierences are signicantly positive only for the yield
measure; and in most cases the cash ow based measures have higher alphas than for the
corresponding OP measure. The GP measure is signicant with TA as the denominator and
with value-weighted returns but not equal-weighted returns, and is not signicant with MVE
as the denominator and with value-weighted returns, but signicant with equal-weighted
returns; in all cases with a lower alpha than for the corresponding OP. For the net income
measure, only with TA as the denominator and value-weighted returns are results signicant.
For value-weighted return results, at least one of the DCFM variables result in larger alphas
than the indirect method variable. Among the DCFM variables, it is dicult to conclude
unequivocally which one is best. Based on value-weighted returns (Panel D) and TA in the
denominator, the alpha for CFO is 1.10%, which translates into an annual return dierence
of 14.0%, even stronger than the Table 3 results. With MVE as the denominator, CFAF
has an alpha of 0.84%, which translates to an annual dierence of 10.6%. Based on equal-
weighted returns (Panel E) and TA as the denominator, the CFAFAT alpha is 0.85%, which
translates to an annual dierence of 10.7%. With MVE as the denominator, CFAF has an
alpha of 0.86%, which translates to an annual dierence of 10.8%. (In section 7 we explore
what incremental information may lead to dierent results among the DCFM variables.)
Thus even controlling for well-known risk factors we nd signicant value from utilizing
information available from our direct cash ow statements.
We again contrast our P10-P1 results to those of Novy-Marx (2013) as reported in his
Table 2. Despite dierences in methodologies described in the previous section as well as his
use of the traditional Fama-French three-factor model that excluded the liquidity factor in
our study, it is comforting to nd that our alpha estimates for the gross prot-to-total assets
18
measure, 0.69% based on value-weighted returns and 0.33% based on equal-weighted returns,
bracket his estimate of 0.52%. (Curiously, for the gross prot-to-market value of equity
measure, we uncover an alpha of 0.48% based on value-weighted returns and 0.71% based on
equal-weighted returns, while Ball et al. (2014) nd a negative but not signicant alpha for
their longer sample period.) Thus we are not concluding that his measure performs poorly
given our dierent sample and design, but rather we conclude that cash-based measures
perform even better.
As noted by Fama and French (1992) and Ball et al. (2014), the relationship between
the various return on asset and yield measures and future stock returns can be explained
by either rational or irrational asset pricing stories. Mispricing may be explained by the
behaviors and biases of irrational investors or short-term trading frictions, or alternatively
there may be risk factors not captured by the ve factors included in our regression model.
Persistence of returns, as examined in the next section, may be consistent with a rational
explanation if we assume that trading frictions shouldnt persist over longer periods.
6 Robustness Checks
6.1 Extended Horizon Returns
In Table 6 we re-examine our earlier one-month-ahead value-weighted return results by ex-
amining a variety of extended horizon holding periods, including three months (Panel A), six
months (Panel B), and twelve months (Panel C). The results are generally consistent with the
one-month return results. In Panel A, the return dierences are signicantly positive in all of
the cash ow return measure cases as well as the operating prot, OP/TA, and gross prot,
GP/TA measures while the traditional return on asset measure, NI/TA, is not signicant.
Return dierences are highest for the DCFM measures followed by the GP/TA measure
and then the indirect method cash ow measures. The three-month return dierence for
the CFAF/TA measure is 2.1% (annualized 8.7%). For the yield measures all of the return
19
dierences are signicantly positive with a similar order of magnitude for the CFAF/MVE,
CFIM/MVE, OP/MVE and GP/TA measures, while the earnings yield, NI/MVE, is only
marginally signicant. The three-month return dierence for the CFAF/MVE measure is
2.1% (annualized 8.6%). Among the return on asset measures, the information ratio is high-
est for the GP/TA measure given the much lower standard deviation of returns. Among the
yield measures the information ratio is much higher for the cash ow measures compared
with the protability measures.
In Panel B, for the six-month horizon, the return dierences for the return on asset
measures are again signicantly positive in all cases except for the NI/TA measure. The
highest return dierence is again for the CFAF/TA variable, with a six-month return of
3.4% (annualized 6.9%). Among the yield measures the CFIM/MVE and GP/MVE six-
month returns are almost identical, at around 3.8% (7.7% annualized). For the return on
asset measures, the information ratio is highest for the GP/TA measure followed by the
various cash ow measures, while for the yield measures the cash ow measures dominate
based on the information ratio.
Results in Panel C are similar to those in Panel B. For both the return on asset measures
and for the yield measures the DCFM measures resulted in superior information ratios
compared to the indirect measure. Most of the DCFM and indirect method return on asset
return dierences are generally superior to the protability measures, which in turn are
superior to the NI/TA and NI/MVE measures. Even for the 12-month horizon, the high-
low CFAF/MVE portfolio oered returns of almost 7.5%. Overall our Table 6 results are
consistent with our earlier results and also suggest, while still positive and signicant, only
a small tapering of return dierences for longer horizons.
6.2 Sector Analysis
We check to see whether our results are sector-specic. We perform a number of tests. First
we segregate our sample among the ten Global Industry Classication Standard (GICS) sec-
20
tors: energy, materials, industrials, consumer discretionary, consumer staples, health care,
nancials, information technology, telecommunication services, and utilities (recall that -
nancials are not included in previous results but are included here since results are segmented
by industry). We estimate information ratios for each of our measures within each sector.
Based on un-tabulated results, while there is no consistent pattern across all sectors, we
can summarize our results as follows. For the measures with total assets as the denom-
inator, cash ow measures tend to do better than the various protability and earnings
measures particularly in the energy and industrial sectors, but also in materials, consumer
discretionary, health care, and telecom, as well as nancials. Information ratios are strong
across all measures for telecom rms, with the operating protability measure doing the
best. Information ratios are low across all measures in consumer staples (except for NI/TA)
and utilities. For the measures with market value of equity as the denominator, cash ow
measures tend to do better than the various protability and earnings measures particularly
in the industrial, consumer discretion, and technology sectors, but also in consumer staples
and telecom. Protability measures tend to do better in the energy, materials, and health
care. Information ratios are low across all measures in utilities, and only NI/MVE does well
in the nancial sector.
In Table 7, we present another set of robustness checks related to the nature of the sectors
in which stocks in the long-short portfolio are invested. It is possible that the composition
of the lowest return portfolio based on sorting, P1, might be very dierent from the com-
position of the highest return portfolio based on sorting, P10, in terms of the sectors in
which the stocks are invested. To control for this, we create sector neutral portfolios. We
repeat our sorting procedure within each of 20 of the 24 GICS industry groups (recall that
nancialsbanks, insurance companies, diversied nancials, and REITsare eliminated
from our sample). P1 (P10) is populated by the lowest (highest) performing stocks by decile
within each sector.
Table 7, Panel A presents the one-month-ahead value-weighted return results. The results
21
are generally consistent with those in Table 3, with some notable exceptions. For the return
on asset results, we see the pattern that cash ow measures tend to have higher return
dierences and information ratios than protability measures, except the NI/TA measures
does very well. Interestingly, neither of the OP/TA and GP/TA return dierences are
signicant, suggesting results in other studies that highlight these variables may be beneting
from a long position in one particular industry and a short position in stocks in a dierent
industry. For the yield measures, the only marginally-signicant results are for the GP/MVE
measure, while all of the other return dierences are signicant.
Table 7, Panel B presents a nal sector robustness check. We present sector neutral
portfolio results for the regression analysis. The results are similar to those in Table 5,
with similar exceptions to those uncovered in Panel A. Neither of the OP/TA and GP/TA
alphas are signicantly dierent from zero. For the yield measures the GP/MVE alpha is
also not signicant. Thus it appears that our results are not being driven by sector specic
performance, with the exception of the gross prot results.
6.3 Growth, Size, Momentum, and Protability
In this section of analysis we investigate the extent to which our results may be related to
four well-known empirical regularities whereby 1) value or high book-to-price stocks tend to
outperform growth or low book-to-price stocks; 2) small market capitalization stocks tend
to outperform large cap stocks; 3) high price momentum stocks tend to outperform (in
the short-run) low price momentum stocks; and most recently, as uncovered by Novy-Marx
(2013), 4) high gross prot-to-total asset stocks tend to outperform low gross prot-to-total
assets stocks. We perform four separate sets of analysis examining one-month-ahead returns.
We start by forming ve portfolio quintiles sorted by their beginning-of-month book-to-price
(B/P) ratio. Then within each of those portfolios we form ve sub-portfolios sorted on the
basis of the beginning-of-month cash ow metric, either a cash ow return metric or cash ow
yield metric. Consequently we have 25 portfolios. If our results are simply a manifestation
22
of the value-growth phenomenon then we would not expect to nd any signicant dierences
in returns comparing the high (quintile 5) and low (quintile 1) cash ow metrics within a
particular B/P category. We perform similar analysis for size, momentum, and gross prot.
Table 8 compares various two-way sorts for one of our arbitrarily-chosen cash ow return
on asset measures, CFAFAT/TA, in Panel A, and one of our cash ow yield measures,
CFAFAT/MVE, in Panel B.
For the cash ow return on asset metric, Panel A, the high-low returns are signicant
across most of the book-to-price quintiles except the third and fourth ones; across most of
the size quintiles expect the smallest one; across most of the momentum quintiles except the
fourth one; and across the second lowest GP/TA quintile. For the cash ow yield metric,
Panel B, the high-low returns are signicant across most of the book-to-price quintiles except
the third and fourth ones; across all of the size quintiles; across most of the momentum
quintiles except the highest one; and across most of the GP/TA quintiles except the lowest
one. Consistent across both panels, results appear to be strongest for low momentum stocks.
Thus our analysis suggests that our results are not simply a confounding eect of other well-
known eects.
7 Cash Flow Components
In previous analyses we showed the superiority of various cash ow measures in predicting
the cross-section of future returns, but did not conclude whether one of the cash ow mea-
sures was better than others. In this nal section of analysis we investigate the impact of
segregating various cash ow components in order to attempt to uncover why one cash ow
measure might be better than another at predicting stock returns.
As a preliminary investigation, we examine the correlations of the time-series of the
averages across rms of various cash ow measures and components: our direct method
cash ow from operations measure, CFODM; our indirect method cash ow from operations
23
measure, CFOIM; Novey-Marxs (2013) free cash ow measure of net income plus deprecia-
tion/amortization, less working capital change, less capital expenditures, CFONM; nancing
activities, FinAct (see Table 1 for denitions of this and other activities measures); tax
activities, TaxAct; other activities, OthAct; and capital expenditures, Capex. Each of the
variables is deated by either total assets, TA or market value of equity, MVE. Results are
presented in Table 9, with Panel A showing the Pearson correlations and Panel B showing
the Spearman correlations. The correlation patterns are similar in both panels and so our
discussion below focuses on the Panel A results.
Not surprisingly, there is a high correlation among the CFODM/TA, CFOIM/TA and
CFONM/TA measures: 0.81 comparing the rst two, dropping to 0.45 comparing the rst
and third. Consistent with Ball et al. (2014) the correlations across variables with the same
numerator but MVE instead of TA in the denominator are quite low in many instances: for
CFODM 0.28, for CFOIM 0.32, and for CFONM 0.47. These results show the impact of the
book value of total assets that changes slowly over time compared to the market value of
equity that changes more frequently and generally by larger magnitudes.
Across the three cash ow measures that are deated by TA, we see a consistent pattern
of correlations compared to FinAct (negative), TaxAct (positive), and Capex (positive).
The absolute value of the correlations with FinAct are generally low, below 0.23, while those
with Capex are generally slightly higher and those with TaxAct are higher still, above 0.48.
The absolute value of the correlations with OthAct is low compared to the CFODM and
CFOIM variables, but surprisingly high at 0.55 with the CFONM variable. Not surprisingly
the correlations tend to be lower with MVE in the denominator. These preliminary results
suggest a more rigorous investigation of the components of cash ows is warranted.
As such, in the spirit of Ball et al. (2014, Table 6) we perform Fama and MacBeth (1973)
cross-section regressions. For each month of our sample we regress the one-month ahead
returns for each stock on our net cash ow from operations measure, Net CF Ops (A in our
Table 1 template); Financing Activities as measured by interest expenses +/- other nancing
24
income/expenses; Tax Activities as measured by taxes on the income statement +/- changes
in accounts payable taxes +/- changes in deferred taxes; other non-operating activities, Non-
Op Activities, as measured as discontinued operations/special charges +/- foreign exchange
gains/losses +/- pension gains/losses/contributions; and capital expenditures, Capex. We
deate all of these variables by the book value of total assets. Similar to Ball et al. (2014) we
include a number of control variables: log(BVE/MVE) is the natural logarithm of the ratio
of the book value of equity to market value of equity; log(ME) is a size variable measured
as the natural logarithm of the market value of equity; r1,1 is the stocks one-month-prior
return; and r12,2 is the stocks prior years return skipping a month. We winsorize all
independent variables based on the rst and 99th percentiles. We also perform separate
regressions that replace the Net CF Ops variable with either our measure of cash ows from
operations based on the indirect cash ow method, CFOIM, or Novey-Marxs (2013) free cash
ow measure of net income plus depreciation/amortization, less working capital change, less
capital expenditures.
In Table 10 we present our results that include averages of the Fama and MacBeth (1973)
slope coecients along with their t-values. Column (1) presents the regression of Net CF
Ops alone with the control variables. We see that the Net CF Ops coecient estimate is
signicant, with a t-statistic of 3.22. In the next four regressions we add one additional vari-
able that represents a segmentation of cash ows: column (2) presents Financing Activities
and control variables; column (3) presents Tax Activities and control variables; column (4)
presents Non-Op Activities and control variables; and column (5) presents Capex and control
variables. When we add these variables individually, the Net CF Ops coecient estimate
remains signicant but only the Capex variable is marginally signicant, with a t-statistic
of -1.89. The next two regressions add combinations of variables: column (6) presents Fi-
nancing Activities, Tax Activities and control variables; and column (7) presents Financing
Activities, Tax Activities, Non-Op Activities and control variables. In these regressions the
Net CF Ops variable remains signicant but none of the added variables are signicant. Col-
25
umn (8) presents all variables. In addition to the Net CF Ops variable, the Tax Activities
coecient estimate is negative and marginally signicant with a t-statistic of -1.91, while
the Capex coecient estimate is also negative and signicant, with a t-statistic of -2.03.
Our nding no signicance in the Financing Activities coecient estimate is consistent with
Ball et al. (2014) who nd no signicance with their Interest coecient estimate for their
all-but-microcaps sample. However, unlike Ball et al. (2014) we nd our Tax Activities
coecient estimate is signicant while theirs is not. We would expect that as cash taxes
increase, there should be a negative correlation with the intrinsic value of equity holders.
Column (9) presents the regression of CFOIM and all variables. The CFOIM coecient
estimate is signicant as expected, with a t-statistic of 3.71. Consistent with our column (8)
results, the Capex coecient estimate is signicantly negative. The Tax Activities coecient
estimate is still negative but not signicant, while the Non-Op Activities coecient estimate
is negative and marginally signicant. Finally, column (10) presents free cash ows, FCF,
measured as in Novy-Marx (2013) as net income plus depreciation less change in working
capital less capital expenditures. Only the Non-Op Activities variables is signicant. Overall
our results suggest that the best information for predicting the cross-section of returns for our
sample comes from the disaggregation of cash ows in a manner that captures the direct cash
ow method. In particular, there is incremental information in disaggregating tax activities
and capital expenditures.
8 Conclusions
Inspired by Novy-Marx (2013), much recent attention has been focused on the importance
of income statement related measures such as gross prot-to-total assets as predictors of the
cross-section of returns. We show that commonly used income statement related metrics
including return on assets and earnings yields are poor return predictors, and cash-based
measures are superior to operating protability and gross protability-to-total asset mea-
26
sures. We examine strategies that suggest superior risk-adjusted returns based on utilizing
transformed nancial statements using our DCFM to estimate free cash ows. We create a
direct cash ow template by segregating operating cash ows from activities related to -
nancing, tax, non-operations, and investing. We argue that this segregation assists investors
to understand how value is being created and hence better estimate what is the true intrinsic
value of the rms equity. We nd that DCFM return on asset and DCFM yield measures are
generally superior to the indirect cash ow method at predicting stock returns, which in turn
are generally superior to income statement measures based on protability. When we con-
trol for well-known risk factors related to the market, market capitalization, book-to-market
ratios, price momentum, and liquidity using regression models, we nd similar results. We
also test dierent return holding periods and we perform robustness checks that control for
sector performance, and nd similar results. Through a double-sorting procedure we show
that our results are not simply manifestations of other well-known phenomena related to
value/growth, size, momentum, and protability. Our Fama-MacBeth regressions suggest
the incremental importance, in particular, of information related to taxes and capital ex-
penditures, in addition to information on operating cash ows. Future research may provide
further explanations as to why those variables are important to forecasting stock returns.
Our conclusionthat there is incrementally better information by segregating cash ows
to account for both nancing activities and taxeslends support to the International Ac-
counting Standards Board (IASB) and the U.S. Financial Accounting Standard Boards
(FASB) initiatives to require reconstructed nancial statements. From an investment per-
spective, investors may be able to derive better information about the future prospectsand
hence future stock returnsby relying on cash ows that disaggregate operating cash ows
from nancing, tax, non-operating and non-recurring activities.
27
A Comparison between the Income Statement, the In-
direct and Direct Cash Flow Statements
Corporations can present their net cash ow from operating activities by using either the
direct or indirect method. Under each, net cash ows from operating activities will be the
same. However, the direct method presents the specic amounts of cash received and paid
for each signicant business activity and the resulting net cash ow arising from operating
activities. We argue that using the structure of the income statement and the informational
content of the cash ow statement, investors are better able to isolate recurring cash ows
that are additive to net present value, segregate nancing activities that are not and ag
one-o gains/losses.
The indirect method, on the other hand, derives net cash from operating activities with-
out separately presenting any of the operating cash receipts and payments. The indirect
approach merely reconciles information between the income statement and actual cash ows.
In this way, the indirect statement is not as intuitive as the direct method. In addition, it
is dicult to forecast corporate results that are presented net of operating, nancing and
tax eects.
To highlight some of the key concepts and illustrate how operating cash ows are reported
using both the direct and indirect methods, we begin with XYZ Corp.s income statement
and balance sheet amounts:
Income Statement Amounts Balance Sheet Amounts
Sales $1000 Change in Accounts Receivable (A/R) +$200
-Cost of Goods Sold 700 Change in Inventory +100
-Operating Expenses 100 Change in Accounts Payable (A/P) Operations -50
-Depreciation 10 Change in Accounts Payable (A/P) Taxes +90
-Interest Expense 10
+Interest Income 3
-Corporate Taxes 35
Net Income $148
Using the direct method, net operating cash ows are calculated using specic cash inows
and outows related to the income statement and balance sheet working capital accounts.
28
For example,
Cash Inows:
Sales $1000
Change in A/R -200 (where A/R increases, cash has yet to be received)
Gross Cash Inows $800
Cash Outows:
Cost of Goods Sold -$700
Operating Expenses -100
Change in Inventory -100
Change in A/P Operations -50 (where A/P decreases, cash was paid)
Gross Cash Outows -950
Direct Business Cash Flows -$150
Financing:
Interest Expense -$10
Interest Income +3
Financing Outows -$7
Corporate Taxes:
Income Statement Taxes -$35
Changes in A/P Taxes +90
Net Tax Cash Flows +$55
Net Cash From Operating Activities -$102
The information presented here depicts gross cash inows and outows in a straightforward
manner, along with an undistorted view of accrual revenues and costs versus cash inows
and outows. For example, while XYZ booked $1000 in sales, only $800 was received in cash
for the period, and the balance was sold on credit. Cost of goods sold, operating expenses
and working capital needs totaled $850. On an operating cash ow basis the rm suered a
-$150 loss for the period. Recall that net income is reported as +$148. As a result of interest
expenses and a favourable tax aect, net operating cash ows were only -$102.
Using the indirect method, net operating cash ows are calculated using the dierences
between net income and working capital changes. For example,
29
Net Income $148
Add/Subtract Non-Cash Adjustments:
Depreciation +10
Change in A/R -200
Change in Inventory -100
Change in A/P Operations -50
Change in A/P Taxes +90
Net Cash from Operating Activities -$102
Both methods conclude that net cash from operating activities is -$102. However, the
direct method shows specic amounts of cash receipts and payments segregated by major
business activities. The indirect method merely reconciles net income to the operating cash
ows. Users of the indirect statement may not fully appreciate that business activities
(pre nancing, pre-tax) generated -$150, while a tax benet of $90 minimized the overall
cash outows. Also, while the direct statements links working capital gains/losses to their
respective source accounts (accounts receivable to sales, accounts payables to cost of goods
sold) the indirect statement relates these working capital changes to net income. It leaves
the user with the cumbersome task of sorting and rearranging. Thus investors have three
dierent measures to extrapolate: net income $148, direct business cash ows of $-150, or
net operating cash ows of -$102.
30
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35
Table 1: Direct Cash Flow Template
This table presents a template for the estimation of various free cash ow direct measures
presented in the paper. FCF AFTA is measured as C - capex, FCF AF is measured as B -
capex, and FCF O is measured as A - capex.
Operating Activities
Cash Inows:
Sales
+/- change in accounts receivable
+/- change in deferred revenues
+/- change in other cash inows from operations
= Cash inows to the rm
Cash Outows:
less: cost of goods sold
less: selling general & administrative expenses
+/- change in accounts payable from operations
+/- change in inventories
= Net Cash Flows from Operations (A)
Financing Activities
less: interest expense
+/- other nancing income/expenses
Net Cash Flows from Operations After Financing Activities (B)
Tax Activities
less: taxes on income statement
+/- change in accounts payable taxes
+/- change in deferred taxes
= Net Cash Flows from Operations After Financing and Tax Activities (C)
Other Non-Operating Activities (Extraordinary Activities)
+/- discontinued operations/special charges
+/- foreign exchange gains/losses
+/- pension gains/losses/contributions
= Net Cash Flows from Operations After Financing, Tax, and
Extraordinary Activities (D)
Investing Activities
less capital expenditures (capex)
= Free Cash Flows to Equity Holders (FCF)
36
Table 2: Descriptive Statistics
This table presents summary statistics for variables used to create free cash ow estimates for
non-nancial S&P 1500 stocks, quarterly from October 1992 to December 2013. The mean
(Mean), minimum (Min) and maximum (Max) observations are presented, in $millions, along
with various percentile cutos (P1, P50, and P99). Variables include operating activities-
net cash ow (Xpressfeed mnemonic OANCF), net sales (SALE), accounts receivable - de-
crease/increase (RECCH), cost of goods sold (COGS), selling, general and administrative
expense (XSGA), depreciation and amortization - income statement (DP), depreciation and
amortization - cash ow statement (DPC), funds from operations - other (FOPO), accounts
payable and accrued liabilities - increase /decrease (APALCH), inventory - decrease/increase
(INVCH), assets and liabilities - other - net change (AOLOCH), sale of property, plant and
equipment and investments - gain/loss (SPPIV), interest and related expense - total (XINT),
income taxes - total (TXT), income taxes - accrued - increase/decrease (TXACH), deferred
taxes - cash ow (TXDC), special items (SPI), discontinued operations (DO), extraordinary
items (XI), capital expenditure (CAPX) and income before extraordinary items - available
for common (IBCOM).
Variable Mean Min P1 P50 P99 Max
OANCF 513 -22,365 -133 81 7,609 61,236
SALE 4,352 -219 6 914 58,689 476,294
RECCH -30 -10,766 -767 -4 342 13,651
COGS 2,992 -1 3 553 41,551 358,069
XSGA 767 -283 4 160 10,782 91,129
DP 216 -4 0 37 2,832 21,577
DPC 229 -941 0 39 2,970 44,917
FOPO 79 -112,954 -338 6 1,674 52,885
APALCH 22 -5,797 -374 3 687 7,951
INVCH -22 -55,024 -549 -1 263 58,188
AOLOCH 0 -55,521 -635 0 634 38,540
SPPIV -14 -14,535 -309 0 29 7,276
XINT 98 -1 0 14 1,086 26,586
TXT 129 -34,831 -161 19 2,092 39,217
TXACH 3 -2,110 -157 0 180 9,454
TXDC 8 -35,561 -314 0 475 7,895
SPI -53 -52,740 -1,130 0 195 125,703
DO 5 -14,316 -121 0 207 25,896
XI -6 -54,235 -59 0 3 5,045
CAPX 287 -1,053 0 40 4,018 37,985
IBCOM 237 -62,834 -867 36 4,551 125,769
37
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39
Table 4: Returns and Yield Measures and One-Month-Ahead Returns: Sub-Period Results
This table measures the average one-month-ahead value-weighted return (%) on portfolios sorted
on the basis of various cash ow and yield measures with P1 the lowest decile S&P 1500 stocks
and P10 the highest decile stocks, and P10-P1 is the return dierence. The results are based
on value-weighted returns for non-nancial rms only (see Table 3, Panel A for overall results).
The various measures are dened in Table 3. Panel A covers October 1994 to February 2000, the
technology bubble period; Panel B covers March 2000 to July 2007, the post-technology bubble
and pre-nancial crisis period; Panel C covers August 2007 to May 2009, the nancial crisis period;
and Panel D covers June 2009 to December 2013, the post-nancial crisis.
Panel A: Sub-period 1, October 1994 to February 2000 (65 months)
Measure P1 P10 P10-P1 Std Dev T-stat Min Max IR
CFAFAT/TA 1.398 3.066 1.669 4.788 [5.30] -10.505 12.545 1.207
CFAF/TA 1.433 3.041 1.608 4.769 [5.12] -10.048 12.824 1.168
CFO/TA 1.503 3.001 1.498 4.897 [4.65] -10.233 12.28 1.060
CFIM/TA 1.627 3.039 1.412 4.766 [4.50] -8.919 13.376 1.026
OP/TA 2.046 3.352 1.306 4.903 [4.05] -8.071 14.284 0.923
GP/TA 2.049 3.062 1.013 4.138 [3.72] -8.589 11.545 0.848
NI/TA 2.790 3.123 0.332 4.064 [1.24] -8.956 10.686 0.283
CFAFAT/MVE 1.442 1.81 0.368 3.877 [1.44] -11.336 9.193 0.329
CFAF/MVE 1.546 1.805 0.259 3.895 [1.01] -11.875 8.992 0.231
CFO/MVE 1.663 1.758 0.095 4.122 [0.35] -10.901 11.031 0.080
CFIM/MVE 1.459 1.651 0.192 3.756 [0.78] -7.828 8.661 0.177
OP/MVE 2.412 2.091 -0.321 5.938 [-0.82] -20.691 17.852 -0.187
GP/MVE 2.711 1.701 -1.010 5.851 [-2.62] -20.541 12.533 -0.598
NI/MVE 2.375 1.698 -0.677 4.609 [-2.23] -12.473 11.92 -0.509
Panel B: Sub-period 2, March 2000 to July 2007 (89 months)
Measure P1 P10 P10-P1 Std Dev T-stat Min Max IR
CFAFAT/TA -0.004 -0.043 -0.039 4.514 [-0.13] -11.740 14.953 -0.030
CFAF/TA -0.609 0.117 0.726 4.737 [2.33] -12.906 15.300 0.531
CFO/TA -0.543 0.142 0.685 4.523 [2.30] -8.031 16.011 0.525
CFIM/TA 0.034 -0.018 -0.052 4.755 [-0.17] -15.334 13.541 -0.038
OP/TA -0.216 -0.273 -0.057 4.485 [-0.19] -9.939 12.109 -0.044
GP/TA 0.105 0.195 0.090 3.378 [0.40] -7.387 10.049 0.092
NI/TA -0.399 -0.037 0.362 5.711 [0.96] -23.592 15.464 0.220
CFAFAT/MVE 0.385 1.078 0.693 3.497 [3.01] -8.402 11.313 0.687
CFAF/MVE 0.156 1.300 1.144 3.547 [4.90] -6.733 12.210 1.117
CFO/MVE 0.031 1.177 1.146 4.376 [3.98] -10.092 20.451 0.908
CFIM/MVE 0.411 1.548 1.137 4.041 [4.28] -8.540 12.088 0.975
OP/MVE -0.860 0.923 1.783 6.881 [3.94] -22.587 30.258 0.898
GP/MVE -0.735 1.267 2.003 6.217 [4.90] -15.105 27.587 1.116
NI/MVE -0.445 1.554 1.999 6.941 [4.38] -26.958 24.932 0.998
40
Panel C: Sub-period 3, August 2007 to May 2009 (22 months)
Measure P1 P10 P10-P1 Std Dev T-stat Min Max IR
CFAFAT/TA -0.622 -1.357 0.735 6.390 [1.75] -10.997 14.247 0.398
CFAF/TA -0.594 -1.235 0.641 5.486 [1.78] -9.876 12.359 0.405
CFO/TA -0.745 -1.175 0.430 6.044 [1.08] -12.089 12.361 0.247
CFIM/TA -0.889 -1.477 0.589 6.361 [1.41] -11.750 12.467 0.321
OP/TA -1.003 -2.543 1.540 7.097 [3.30] -18.139 11.874 0.752
GP/TA -0.686 -1.842 1.155 3.333 [5.27] -3.054 10.506 1.201
NI/TA -0.932 -0.652 -0.280 5.181 [-0.82] -12.697 12.461 -0.187
CFAFAT/MVE -0.271 -1.278 1.006 7.058 [2.17] -9.806 20.771 0.494
CFAF/MVE -0.823 -1.242 0.419 6.247 [1.02] -10.851 13.083 0.232
CFO/MVE -1.821 -0.973 -0.848 6.953 [-1.85] -13.778 13.532 -0.422
CFIM/MVE -1.282 -1.270 -0.012 6.541 [-0.03] -12.829 11.692 -0.006
OP/MVE -0.974 -1.567 0.594 10.178 [0.89] -10.228 38.757 0.202
GP/MVE -0.913 -1.276 0.362 11.980 [0.46] -16.354 43.622 0.105
NI/MVE -0.942 -0.758 -0.184 3.941 [-0.71] -7.057 5.961 -0.162
Panel D: Sub-period 4, June 2009 to December 2013 (55 months)
Measure P1 P10 P10-P1 Std Dev T-stat Min Max IR
CFAFAT/TA 1.565 1.069 0.496 3.172 [2.37] -6.604 7.676 0.541
CFAF/TA 1.629 1.522 0.107 3.441 [0.47] -8.074 7.777 0.108
CFO/TA 1.648 1.399 0.249 3.474 [1.09] -8.301 8.712 0.248
CFIM/TA 1.668 1.436 0.232 3.912 [0.90] -7.219 9.160 0.206
OP/TA 1.576 1.595 -0.018 3.600 [-0.08] -7.706 8.644 -0.018
GP/TA 1.698 1.441 0.258 3.088 [1.27] -5.369 7.629 0.289
NI/TA 1.405 2.039 -0.634 4.017 [-2.40] -9.750 9.287 -0.547
CFAFAT/MVE 2.425 1.378 1.047 2.921 [5.45] -5.848 5.998 1.242
CFAF/MVE 2.366 1.474 0.892 2.904 [4.67] -6.822 8.478 1.064
CFO/MVE 2.181 1.481 0.700 3.270 [3.26] -6.327 7.153 0.742
CFIM/MVE 2.315 1.316 0.999 3.198 [4.75] -6.608 8.478 1.082
OP/MVE 1.925 1.733 0.193 3.278 [0.89] -7.719 10.800 0.203
GP/MVE 2.072 1.824 0.248 3.169 [1.19] -6.453 9.147 0.272
NI/MVE 1.487 2.065 -0.577 3.077 [-2.85] -6.924 7.047 -0.650
41
Table 5: Returns and Yield Measures Regression Results
This table presents regression results for monthly data from October 1994 to December
2013. Average returns are in excess of the one-month Treasury bill rate (from Ken
Frenchs website). The dependent variables are the P1 (lowest) to P10 (highest) portfolio
value-weighted returns (for Panels A through D) or equal-weighted returns (Panel E) for
non-nancial rms for the portfolios sorted on the basis of the various measures described
in Table 3. The independent variables are based on Carharts (1997) extension of the
Fama-French (1993) three-factor model where MKTRF is the market risk premium (market
return in excess of the risk-free rate), SMB is the small minus big (size) factor, HML is
the high minus low (market-to-book) factor, and UMD is the up minus down (momentum)
factor; as well as LIQ, Pastor and Stambaughs (2003) traded liquidity factorsee equation
(1). R
2
is the adjusted R-square. T-statistics, reported in parentheses, are based on Whites
(1980) heteroscedasticity-consistent standard errors are reported below estimates. The
intercept, , is interpreted as the alpha or abnormal return.
Panel A: P1 (value-weighted returns)
Dependent Average
Variable Return MKTRF SMB HML UMD LIQ R
2
CFAFAT/TA 0.285 -0.0023 1.200 0.062 -0.221 -0.093 0.138 0.776
[0.63] [-1.05] [22.66] [0.79] [-2.17] [-1.94] [2.32]
CFAF/TA 0.181 -0.0032 1.174 0.075 -0.246 -0.095 0.131 0.767
[0.41] [-1.46] [22.46] [0.94] [-2.31] [-1.94] [2.21]
CFO/TA 0.203 -0.0029 1.188 0.059 -0.280 -0.105 0.13 0.774
[0.45] [-1.28] [22.40] [0.74] [-2.73] [-2.23] [2.19]
CFIM/TA 0.440 -0.0023 1.285 0.167 -0.133 -0.048 0.179 0.781
[0.93] [-0.97] [21.98] [2.07] [-1.74] [-1.05] [3.10]
OP/TA 0.398 -0.0003 1.272 -0.004 0.118 -0.164 -0.152 0.830
[0.91] [-0.14] [25.64] [-0.08] [1.78] [-3.63] [-3.14]
GP/TA 0.553 0.002 0.968 -0.179 0.114 0.013 -0.041 0.806
[1.79] [1.45] [26.37] [-4.77] [2.01] [0.41] [-1.05]
NI/TA 0.823 0.0038 1.265 0.293 -0.357 -0.235 -0.006 0.838
[1.65] [1.73] [20.29] [3.72] [-4.50] [-4.11] [-0.10]
CFAFAT/MVE 0.528 -0.0002 1.068 0.016 0.190 -0.122 0.209 0.790
[1.38] [-0.08] [22.47] [0.22] [2.83] [-3.18] [4.80]
CFAF/MVE 0.496 -0.0008 1.078 0.030 0.157 -0.109 0.226 0.790
[1.28] [-0.39] [22.94] [0.40] [2.41] [-3.14] [5.13]
CFO/MVE 0.508 -0.0003 1.111 0.020 0.012 -0.105 0.194 0.769
[1.25] [-0.14] [21.72] [0.25] [0.15] [-2.46] [3.88]
CFIM/MVE 0.530 -0.0013 1.189 0.060 0.232 -0.164 0.253 0.778
[1.21] [-0.57] [20.15] [0.66] [3.35] [-3.85] [4.63]
OP/MVE 0.379 -0.0004 1.205 -0.026 -0.618 0.09 -0.009 0.846
[0.85] [-0.25] [24.07] [-0.44] [-7.39] [2.06] [-0.17]
GP/MVE 0.560 0.0016 1.151 -0.126 -0.58 0.125 0.006 0.866
[1.37] [1.07] [26.59] [-2.12] [-8.13] [3.35] [0.13]
NI/MVE 0.684 0.0024 1.265 0.305 -0.189 -0.336 0.010 0.830
[1.35] [1.04] [20.76] [3.50] [-2.22] [-4.64] [0.16]
42
Panel B: P2 through P9 s (value-weighted returns)
Dependent
Variable P2 P3 P4 P5 P6 P7 P8 P9
CFAFAT/TA -0.0018 0.0008 0.0009 0.0037 0.0012 0.0056 0.0053 0.0054
[-1.18] [0.49] [0.65] [2.78] [1.01] [3.92] [3.68] [4.21]
CFAF/TA -0.0001 -0.0031 0.0044 0.0026 0.0022 0.0046 0.0063 0.0036
[-0.07] [-2.33] [3.06] [1.97] [1.56] [3.78] [4.04] [2.87]
CFO/TA -0.0007 0.0002 0.0028 0.0021 0.0025 0.0043 0.0057 0.0046
[-0.42] [0.11] [1.90] [1.85] [1.96] [3.67] [3.84] [3.77]
CFIM/TA -0.0019 0.0002 0.0026 0.0021 0.0022 0.0036 0.0062 0.0053
[-1.14] [0.16] [2.00] [1.48] [1.36] [2.67] [4.77] [3.65]
OP/TA 0.0015 -0.0003 0.0038 0.001 0.0017 0.0029 0.003 0.0049
[0.91] [-0.24] [2.42] [0.67] [1.26] [2.18] [2.62] [3.67]
GP/TA 0.0001 0.0005 0.0001 0.0039 0.0035 0.005 0.0027 0.0058
[0.09] [0.39] [0.08] [2.82] [2.15] [3.28] [1.67] [4.74]
NI/TA -0.0003 0.0016 0.0000 0.003 0.0032 0.0041 0.003 0.0021
[-0.20] [1.26] [-0.01] [2.33] [2.82] [3.45] [2.49] [1.95]
CFAFAT/MVE -0.0010 -0.0013 -0.0008 0.0016 0.0078 0.0054 0.0054 0.0066
[-0.59] [-0.88] [-0.73] [1.49] [5.84] [3.67] [3.83] [3.77]
CFAF/MVE -0.0033 -0.0015 -0.0015 0.0042 0.0062 0.0067 0.0051 0.0089
[-1.91] [-1.02] [-1.41] [3.20] [4.43] [4.41] [3.29] [5.19]
CFO/MVE -0.0034 -0.003 0.0017 0.0069 0.0051 0.0049 0.0067 0.0069
[-2.07] [-2.15] [1.48] [5.26] [3.53] [3.61] [4.46] [4.30]
CFIM/MVE -0.0012 -0.0027 0.0002 0.0009 0.0048 0.0068 0.0092 0.0059
[-0.69] [-2.17] [0.13] [0.70] [3.83] [4.56] [5.13] [4.11]
OP/MVE 0.0031 0.0024 0.0037 0.0032 0.0033 0.0053 0.0046 0.0085
[2.29] [1.80] [2.81] [2.24] [2.11] [3.23] [2.77] [4.07]
GP/MVE 0.0006 0.0029 0.0042 0.0049 0.0047 0.0059 0.0068 0.0064
[0.50] [2.42] [3.38] [3.79] [3.19] [3.96] [3.87] [3.89]
NI/MVE -0.0011 0.0009 0.0023 0.0032 0.0036 0.0042 0.0048 0.0073
[-0.64] [0.67] [1.59] [1.92] [2.34] [3.30] [2.90] [4.20]
43
Panel C: P10 (value-weighted returns)
Dependent Average
Variable Return MKTRF SMB HML UMD LIQ R
2
CFAFAT/TA 0.927 0.0070 0.997 -0.203 -0.391 0.030 -0.051 0.827
[2.68] [4.57] [25.69] [-3.29] [-6.69] [1.00] [-1.51]
CFAF/TA 1.000 0.0078 0.963 -0.236 -0.414 0.055 -0.022 0.828
[2.98] [5.36] [25.42] [-4.02] [-7.62] [1.98] [-0.65]
CFO/TA 0.989 0.0075 0.968 -0.235 -0.383 0.062 -0.016 0.822
[2.95] [5.05] [25.29] [-3.91] [-6.99] [2.34] [-0.47]
CFIM/TA 0.929 0.0071 0.982 -0.233 -0.472 0.078 -0.046 0.859
[2.73] [5.28] [28.95] [-4.53] [-9.61] [2.23] [-1.40]
OP/TA 0.886 0.0066 1.021 -0.240 -0.543 0.110 -0.073 0.836
[2.44] [4.35] [27.08] [-4.45] [-9.47] [4.22] [-2.07]
GP/TA 1.044 0.008 0.924 -0.085 -0.191 0.086 -0.108 0.773
[3.30] [4.96] [22.65] [-1.70] [-3.21] [2.26] [-2.74]
NI/TA 0.878 0.0068 0.946 -0.257 -0.483 0.060 -0.018 0.854
[2.65] [5.05] [29.30] [-5.65] [-10.16] [1.78] [-0.53]
CFAFAT/MVE 1.244 0.0081 0.977 0.214 0.546 -0.401 0.117 0.852
[3.07] [4.93] [22.38] [3.78] [6.88] [-7.75] [2.50]
CFAF/MVE 1.262 0.0076 1.006 0.166 0.545 -0.356 0.18 0.845
[3.12] [4.65] [22.79] [3.05] [6.95] [-8.40] [3.89]
CFO/MVE 1.062 0.0051 1.082 0.174 0.680 -0.325 0.098 0.861
[2.54] [2.90] [21.32] [3.27] [8.59] [-7.31] [2.03]
CFIM/MVE 1.258 0.007 1.036 0.134 0.681 -0.286 0.133 0.859
[3.18] [4.46] [26.44] [3.02] [10.74] [-6.82] [3.25]
OP/MVE 1.078 0.0053 1.116 0.172 0.515 -0.479 0.252 0.814
[2.26] [2.16] [22.55] [1.89] [4.79] [-4.32] [4.34]
GP/MVE 1.141 0.0065 1.054 0.378 0.574 -0.511 0.158 0.816
[2.40] [2.83] [18.57] [4.36] [5.35] [-4.89] [2.35]
NI/MVE 1.109 0.0061 1.009 0.029 0.400 -0.217 0.200 0.792
[2.91] [3.32] [20.34] [0.52] [5.95] [-4.11] [4.48]
44
Panel D: P10-P1 (value-weighted returns)
Dependent Average
Variable Return MKTRF SMB HML UMD LIQ R
2
CFAFAT/TA 0.642 0.0071 -0.195 -0.339 -0.184 0.149 -0.179 0.206
[2.14] [2.57] [-3.00] [-3.82] [-1.63] [2.84] [-2.65]
CFAF/TA 0.819 0.0093 -0.203 -0.265 -0.17 0.123 -0.189 0.161
[2.73] [3.24] [-2.90] [-2.75] [-1.26] [2.10] [-2.59]
CFO/TA 0.786 0.011 -0.211 -0.311 -0.167 0.15 -0.153 0.185
[2.61] [3.94] [-3.08] [-3.19] [-1.26] [2.41] [-2.17]
CFIM/TA 0.489 0.0104 -0.220 -0.294 -0.102 0.167 -0.147 0.193
[1.56] [3.64] [-3.19] [-3.06] [-0.81] [2.89] [-2.07]
OP/TA 0.488 0.0094 -0.303 -0.399 -0.339 0.126 -0.225 0.277
[1.56] [3.32] [-4.30] [-4.40] [-3.45] [1.99] [-3.31]
GP/TA 0.491 0.0069 -0.250 -0.235 -0.661 0.273 0.079 0.393
[2.10] [2.81] [-4.08] [-2.99] [-6.73] [5.36] [1.25]
NI/TA 0.056 0.0059 -0.043 0.094 -0.305 0.073 -0.067 0.13
[0.17] [2.61] [-0.71] [1.49] [-3.42] [1.52] [-1.08]
CFAFAT/MVE 0.716 0.0082 -0.090 0.198 0.356 -0.279 -0.092 0.263
[2.77] [3.46] [-1.47] [2.15] [4.02] [-4.42] [-1.56]
CFAF/MVE 0.766 0.0084 -0.073 0.136 0.387 -0.247 -0.046 0.251
[3.03] [3.66] [-1.19] [1.67] [4.06] [-4.97] [-0.76]
CFO/MVE 0.554 0.0054 -0.029 0.154 0.668 -0.22 -0.096 0.35
[1.91] [2.16] [-0.43] [1.68] [5.69] [-3.75] [-1.65]
CFIM/MVE 0.729 0.0083 -0.153 0.074 0.449 -0.122 -0.120 0.226
[2.71] [3.38] [-2.32] [0.86] [5.60] [-2.25] [-1.96]
OP/MVE 0.699 0.0057 -0.089 0.198 1.133 -0.568 0.260 0.62
[1.67] [2.07] [-1.22] [2.14] [7.07] [-5.89] [3.34]
GP/MVE 0.581 0.0048 -0.097 0.504 1.155 -0.635 0.152 0.657
[1.37] [1.85] [-1.41] [5.81] [7.59] [-6.78] [1.96]
NI/MVE 0.425 0.0037 -0.256 -0.276 0.589 0.120 0.190 0.321
[1.19] [1.13] [-2.95] [-2.71] [4.50] [1.09] [2.24]
45
Panel E: P10-P1 (equal-weighted returns)
Dependent Average
Variable Return MKTRF SMB HML UMD LIQ R
2
CFAFAT/TA 0.687 0.0085 -0.140 -0.279 0.034 0.047 -0.059 0.247
[3.65] [5.05] [-3.15] [-4.30] [0.52] [1.48] [-1.48]
CFAF/TA 0.618 0.0081 -0.175 -0.343 -0.023 0.111 -0.06 0.310
[2.97] [4.48] [-3.62] [-4.72] [-0.33] [2.70] [-1.26]
CFO/TA 0.579 0.0075 -0.183 -0.344 0.032 0.124 -0.053 0.327
[2.69] [4.09] [-3.75] [-4.57] [0.46] [2.99] [-1.14]
CFIM/TA 0.594 0.0088 -0.310 -0.385 -0.104 0.184 -0.089 0.469
[2.47] [4.80] [-6.47] [-4.65] [-1.59] [4.29] [-1.81]
OP/TA 0.437 0.0071 -0.220 -0.383 -0.798 0.288 0.031 0.570
[1.52] [3.47] [-4.31] [-5.24] [-9.43] [4.64] [0.62]
GP/TA 0.257 0.0033 0.0000 0.024 -0.129 -0.031 -0.019 0.02
[1.17] [1.44] [0.00] [0.27] [-1.55] [-0.58] [-0.30]
NI/TA -0.073 0.0024 -0.349 -0.655 -0.412 0.307 0.031 0.564
[-0.23] [1.11] [-6.59] [-7.66] [-4.57] [5.07] [0.68]
CFAFAT/MVE 0.876 0.0079 0.036 0.140 0.481 -0.08 -0.062 0.285
[4.33] [4.26] [0.77] [1.88] [7.29] [-1.23] [-1.41]
CFAF/MVE 0.903 0.0086 0.007 0.094 0.52 -0.124 -0.072 0.328
[4.15] [4.49] [0.13] [1.24] [7.17] [-1.81] [-1.44]
CFO/MVE 0.842 0.0079 -0.011 0.035 0.669 -0.154 -0.054 0.429
[3.38] [3.86] [-0.20] [0.41] [9.01] [-2.10] [-1.09]
CFIM/MVE 0.885 0.0092 -0.119 -0.036 0.470 0.058 -0.158 0.332
[3.86] [4.51] [-2.16] [-0.44] [6.87] [0.73] [-2.95]
OP/MVE 0.816 0.0077 0.028 -0.052 0.92 -0.566 0.166 0.594
[2.05] [2.90] [0.45] [-0.43] [6.90] [-5.29] [2.59]
GP/MVE 0.827 0.0071 0.041 0.286 1.211 -0.632 0.099 0.641
[1.86] [2.53] [0.68] [2.00] [9.04] [-5.45] [1.43]
NI/MVE 0.198 0.0036 -0.253 -0.430 0.219 -0.011 0.089 0.320
[0.69] [1.42] [-4.27] [-4.07] [2.41] [-0.13] [1.66]
46
Table 6: Returns and Yield Measures and Various Return Horizons
This table measures the average one-month-ahead (Panel A), six-month-ahead (Panel B), and
twelve-month ahead (Panel C) return (%) on value-weighted portfolios of non-nancial rms sorted
on the basis of various measures are dened in Table 3 with P1 the lowest decile S&P 1500 stocks
and P10 the highest decile stocks, and P10-P1 is the return dierence. Std Dev is the standard
deviation, T-stat is the t-statistic of the signicance of P10-P1, Min is the minimum return, Max
is the maximum return, and IR is the information ratio measured as annualized P10-P1 return
divided by the annualized standard deviation of the return dierence.
Panel A: Three-Month Returns
Measure P1 P10 P10-P1 Std Dev T-stat Min Max IR
CFAFAT/TA 1.811 3.598 1.786 7.903 [3.44] -18.180 29.872 0.452
CFAF/TA 1.584 3.691 2.107 8.066 [3.97] -19.829 30.423 0.522
CFO/TA 1.684 3.717 2.033 8.057 [3.83] -20.919 30.188 0.505
CFIM/TA 2.191 3.602 1.411 8.856 [2.42] -23.145 27.233 0.319
OP/TA 2.198 3.462 1.265 8.708 [2.21] -27.720 21.504 0.291
GP/TA 2.471 3.973 1.502 5.626 [4.06] -12.348 25.809 0.534
NI/TA 3.186 3.429 0.244 8.299 [0.45] -24.221 20.945 0.059
CFAFAT/MVE 2.604 4.341 1.736 7.320 [3.61] -20.142 35.201 0.474
CFAF/MVE 2.565 4.645 2.079 7.759 [4.07] -18.316 38.174 0.536
CFO/MVE 2.456 4.018 1.563 8.171 [2.91] -20.556 29.747 0.382
CFIM/MVE 2.423 4.512 2.088 7.460 [4.25] -17.380 26.080 0.560
OP/MVE 2.253 4.188 1.935 11.426 [2.57] -33.748 64.878 0.339
GP/MVE 2.253 4.188 1.935 11.426 [2.57] -33.748 64.878 0.339
NI/MVE 2.875 4.027 1.152 9.771 [1.79] -31.252 35.465 0.236
Panel B: Six-Month Returns
Measure P1 P10 P10-P1 Std Dev T-stat Min Max IR
CFAFAT/TA 4.275 7.217 2.942 12.240 [3.65] -24.207 41.896 0.340
CFAF/TA 3.866 7.265 3.400 12.061 [4.28] -22.853 41.202 0.399
CFO/TA 4.091 7.337 3.246 12.277 [4.02] -24.132 39.851 0.374
CFIM/TA 4.212 7.284 3.072 13.125 [3.56] -28.812 42.071 0.331
OP/TA 4.833 6.994 2.161 12.762 [2.57] -35.584 31.882 0.240
GP/TA 5.169 8.348 3.179 7.888 [6.13] -15.504 31.783 0.570
NI/TA 6.578 7.008 0.430 12.107 [0.54] -34.101 28.370 0.050
CFAFAT/MVE 5.763 8.556 2.793 11.275 [3.77] -25.817 45.529 0.350
CFAF/MVE 5.458 8.990 3.532 11.917 [4.50] -23.932 54.126 0.419
CFO/MVE 5.112 8.121 3.009 12.669 [3.61] -31.090 41.945 0.336
CFIM/MVE 5.207 8.983 3.776 12.079 [4.75] -37.005 47.482 0.442
OP/MVE 5.074 8.695 3.621 17.105 [3.22] -48.616 90.347 0.299
GP/MVE 5.097 8.879 3.782 19.824 [2.90] -49.186 90.897 0.270
NI/MVE 5.750 7.890 2.139 15.036 [2.16] -45.316 59.371 0.201
47
Panel C: Twelve-Month Returns
Measure P1 P10 P10-P1 Std Dev T-stat Min Max IR
CFAFAT/TA 9.301 14.379 5.078 19.893 [3.88] -49.363 83.059 0.255
CFAF/TA 8.722 14.242 5.520 19.313 [4.34] -44.934 70.266 0.286
CFO/TA 9.234 14.344 5.110 20.000 [3.88] -48.936 76.418 0.256
CFIM/TA 7.771 13.870 6.099 21.566 [4.30] -61.148 61.966 0.283
OP/TA 10.454 13.604 3.150 18.530 [2.58] -54.246 62.154 0.170
GP/TA 11.145 16.333 5.188 11.279 [6.99] -22.022 40.303 0.460
NI/TA 11.459 13.653 2.194 19.942 [1.67] -75.912 45.506 0.110
CFAFAT/MVE 11.126 16.734 5.608 18.093 [4.71] -47.331 59.867 0.310
CFAF/MVE 9.940 17.430 7.490 18.279 [6.23] -44.268 62.081 0.410
CFO/MVE 9.775 16.176 6.401 20.650 [4.71] -90.129 64.469 0.310
CFIM/MVE 11.125 16.945 5.820 18.539 [4.77] -87.021 63.190 0.314
OP/MVE 10.568 16.660 6.092 22.725 [4.07] -38.039 109.377 0.268
GP/MVE 10.428 16.124 5.696 30.276 [2.86] -56.879 136.297 0.188
NI/MVE 11.214 15.311 4.097 22.912 [2.72] -54.225 76.405 0.179
48
Table 7: Returns and Yield Measures, Sector Neutral Results
Panel A measures the average one-month-ahead return (%) on value-weighted portfolios of
non-nancial rms sorted on the basis of various measures are dened in Table 3 with P1 the
lowest decile S&P 1500 stocks and P10 the highest decile stocks, and P10-P1 is the return
dierence. Portfolios are created by sorting within GICS sectors to ensure sector neutrality. Std
Dev is the standard deviation, T-stat is the t-statistic of the signicance of P10-P1, Min is the
minimum return, Max is the maximum return, and IR is the information ratio measured as
annualized P10-P1 return divided by the annualized standard deviation of the return dierence.
Panel B presents regression results for monthly data from October 1994 to December 2013.
Average returns are in excess of the one-month Treasury bill rate (from Ken Frenchs website).
The dependent variables are the P10 (highest) less P1 (lowest) portfolio value-weighted returns
for non-nancial rms sorted on the basis of various measures described in Table 3. Portfolios are
created by sorting within GICS sectors to ensure sector neutrality. The independent variables are
based on Carharts (1997) extension of the Fama-French (1993) three-factor model where MKTRF
is the market risk premium (market return in excess of the risk-free rate), SMB is the small minus
big (size) factor, HML is the high minus low (market-to-book) factor, and UMD is the up minus
down (momentum) factor; as well as LIQ, Pastor and Stambaughs (2003) liquidity factorsee
equation (1). R
2
is the adjusted R-square. T-statistics, reported in parentheses, are based on
Whites (1980) heteroscedasticity-consistent standard errors are reported below estimates. The
intercept, , is interpreted as the alpha or excess return.
Panel A: One-Month
Measure P10-P1 Std Dev T-stat Min Max IR
CFAFAT/TA 0.606 3.985 [2.31] -16.943 14.375 0.527
CFAF/TA 0.661 4.233 [2.37] -17.556 14.866 0.541
CFO/TA 0.693 4.104 [2.57] -17.547 13.238 0.585
CFIM/TA 0.525 4.210 [1.90] -18.022 10.631 0.432
OP/TA 0.340 4.272 [1.21] -15.177 18.118 0.276
GP/TA 0.203 3.436 [0.90] -12.193 11.459 0.204
NI/TA 0.644 4.033 [2.43] -10.512 12.615 0.553
CFAFAT/MVE 0.523 3.411 [2.33] -10.482 13.318 0.532
CFAF/MVE 0.619 3.490 [2.70] -11.953 13.887 0.615
CFO/MVE 0.774 3.618 [3.25] -10.206 11.792 0.741
CFIM/MVE 0.504 3.461 [2.21] -9.476 13.487 0.504
OP/MVE 0.868 5.448 [2.42] -15.708 30.744 0.552
GP/MVE 0.592 5.025 [1.79] -15.730 17.600 0.408
NI/MVE 0.567 3.768 [2.29] -9.457 15.645 0.521
49
Panel B: Regression Analysis
Dependent Average
Variable Return MKTRF SMB HML UMD LIQ R
2
CFAFAT/TA 0.606 0.0087 -0.150 -0.227 -0.475 0.102 -0.047 0.201
[2.31] [3.56] [-2.23] [-1.92] [-4.44] [1.61] [-0.82]
CFAF/TA 0.661 0.0085 -0.119 -0.237 -0.452 0.185 -0.013 0.213
[2.37] [3.37] [-1.69] [-2.03] [-3.96] [2.72] [-0.21]
CFO/TA 0.693 0.0091 -0.123 -0.247 -0.445 0.173 -0.041 0.217
[2.57] [3.69] [-1.74] [-2.22] [-4.16] [2.63] [-0.65]
CFIM/TA 0.525 0.0091 -0.113 -0.432 -0.671 0.101 -0.132 0.328
[1.90] [3.81] [-1.75] [-5.42] [-6.46] [1.59] [-1.99]
OP/TA 0.340 0.0039 -0.260 0.092 -0.432 0.195 0.190 0.323
[1.21] [1.61] [-4.18] [0.95] [-4.18] [3.48] [3.06]
GP/TA 0.203 0.0028 -0.161 0.046 -0.273 0.162 0.002 0.212
[0.90] [1.36] [-3.25] [0.77] [-3.30] [3.24] [0.04]
NI/TA 0.644 0.0088 -0.155 -0.470 -0.257 0.234 -0.103 0.340
[2.43] [3.81] [-2.57] [-6.20] [-2.81] [4.05] [-1.72]
CFAFAT/MVE 0.523 0.0068 -0.168 -0.221 0.05 -0.029 0.026 0.140
[2.33] [2.92] [-2.58] [-2.58] [0.57] [-0.46] [0.46]
CFAF/MVE 0.619 0.0078 -0.178 -0.203 0.156 -0.038 -0.004 0.180
[2.70] [3.39] [-2.87] [-2.84] [2.02] [-0.69] [-0.06]
CFO/MVE 0.774 0.0087 -0.094 -0.115 0.23 -0.075 -0.038 0.126
[3.25] [3.53] [-1.34] [-1.56] [2.38] [-1.37] [-0.55]
CFIM/MVE 0.504 0.0077 -0.195 -0.373 -0.006 -0.009 -0.076 0.270
[2.21] [3.69] [-3.11] [-5.28] [-0.08] [-0.20] [-1.20]
OP/MVE 0.868 0.0065 0.070 0.370 0.838 -0.443 0.175 0.486
[2.42] [2.40] [1.07] [4.16] [6.13] [-6.02] [2.02]
GP/MVE 0.592 0.003 0.037 0.446 0.964 -0.298 0.125 0.506
[1.79] [1.16] [0.55] [5.44] [9.64] [-4.07] [1.50]
NI/MVE 0.567 0.0079 -0.100 -0.302 0.099 -0.024 -0.153 0.180
[2.29] [3.30] [-1.42] [-3.91] [1.06] [-0.34] [-2.61]
50
Table 8: Returns and Yield Measures Related to Book/Price, Size, Momentum, and Gross
Prot
This table compares various two-way sorts for cash ow returns, CFAFAT/TA, in Panel A, and
cash ow yields, CFAFAT/MVE, in Panel B (see Table 3 for denitions). The measures are average
value-weighted one-month-ahead returns (%) of non-nancial S&P 1500 rms sorted on the basis
of each variable. 25 equal-sized portfolios are formed, rst across ve quintiles sorted on the basis
of each variable, and then into quintiles again within each group, on the basis of book-to-price
(B/P), market capitalization (size), price momentum (momentum), and gross prot-to-total assets
(GP/TA). High - Low is the monthly return (%) dierence between the highest and lowest cash
ow returns or cash ow yield quintiles within a particular B/P, size, or momentum quintile. The
t-stat tests the signicance of the high-low dierence.
Panel A: Cash Flow Returns (CFAFAT/TA)
High-
Low 2 3 4 High Low t-stat
Low B/P 0.316 0.518 0.962 1.034 1.196 0.880 [3.07]
2 B/P 0.294 0.712 1.025 1.236 1.381 1.087 [3.59]
3 B/P 0.916 1.111 0.707 1.000 1.201 0.285 [1.01]
4 B/P 0.895 0.946 1.052 1.411 1.407 0.511 [1.54]
High B/P 0.789 0.907 1.079 1.135 1.667 0.878 [2.59]
Small size 1.376 1.397 1.299 1.566 1.816 0.440 [1.53]
2 size 0.883 1.257 1.130 1.283 1.533 0.650 [3.13]
3 size 0.722 0.991 1.265 1.153 1.381 0.659 [3.26]
4 size 0.762 0.995 1.123 1.226 1.438 0.676 [3.58]
Large size 0.470 0.814 0.819 0.969 1.188 0.718 [3.28]
Low momentum 0.114 0.518 0.973 0.923 1.341 1.227 [3.16]
2 momentum 0.672 0.821 0.986 0.932 1.165 0.493 [1.79]
3 momentum 0.453 0.613 0.794 1.124 1.012 0.559 [2.07]
4 momentum 0.844 0.881 1.000 1.087 0.995 0.151 [0.59]
High momentum 0.873 1.046 1.081 1.221 1.467 0.593 [1.71]
Low GP/TA 0.771 0.648 0.827 1.059 0.825 0.054 [0.19]
2 GP/TA 0.235 0.819 0.747 0.880 1.021 0.785 [2.31]
3 GP/TA 0.619 0.743 1.101 1.153 1.077 0.458 [1.28]
4 GP/TA 1.035 0.763 1.227 0.788 1.048 0.013 [0.04]
High GP/TA 0.941 0.819 1.426 1.347 1.282 0.341 [1.04]
51
Panel B: Cash Flow Returns (CFAFAT/MVE)
High-
Low 2 3 4 High Low t-stat
Low B/P 0.300 0.470 0.836 1.021 1.260 0.960 [2.93]
2 B/P 0.378 0.560 0.985 1.381 1.216 0.838 [2.65]
3 B/P 0.837 1.105 0.965 0.834 1.169 0.332 [1.29]
4 B/P 1.109 0.803 1.064 1.347 1.418 0.309 [1.02]
High B/P 0.818 0.741 1.278 1.414 1.468 0.650 [1.80]
Small size 1.123 1.361 1.403 1.495 2.018 0.896 [3.33]
2 size 0.919 0.964 1.191 1.387 1.573 0.654 [3.47]
3 size 0.806 0.749 1.090 1.284 1.531 0.725 [3.57]
4 size 0.814 0.907 1.117 1.295 1.399 0.585 [2.65]
Large size 0.396 0.676 0.878 1.249 1.222 0.826 [3.55]
Low momentum 0.326 0.437 0.886 1.189 1.734 1.408 [3.60]
2 momentum 0.847 0.746 0.955 1.122 1.306 0.460 [1.64]
3 momentum 0.477 0.353 0.999 1.172 1.384 0.907 [3.81]
4 momentum 0.707 0.677 0.870 1.222 1.235 0.528 [2.09]
High momentum 1.085 0.938 1.178 1.186 1.176 0.091 [0.32]
Low GP/TA 0.880 0.570 0.665 0.944 1.067 0.187 [0.65]
2 GP/TA 0.566 0.583 0.609 0.970 1.409 0.843 [2.29]
3 GP/TA 0.706 0.469 1.288 0.727 1.400 0.693 [1.84]
4 GP/TA 0.873 0.380 0.801 1.313 1.709 0.836 [2.38]
High GP/TA 0.876 0.843 1.394 1.530 1.494 0.618 [1.84]
52
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A
-
0
.
2
3
0
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1
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5
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2
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(
7
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C
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0
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2
2
0
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2
9
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2
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4
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7
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(
8
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C
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0
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2
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53
P
a
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:
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p
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a
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a
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C
o
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l
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(
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1
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F
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54
Table 10: Fama-MacBeth Regressions for Cash Flow Components
This table presents average Fama and MacBeth (1973) slope coecients and their t-values
from cross-sectional regressions. The dependent variables are the one-month ahead returns
for each stock. The independent variables are net cash ow from operations measure (A in
Table 1), Net CF Ops; net cash ow from operations measured by the indirect cash ow
method, CFOIM; free cash ows measured as net income plus depreciation less change in
working capital less capital expenditures, FCF; Fin Act, nancing activities as measured by
interest expenses +/- other nancing income/expenses; Tax Act, tax activities as measured
by taxes on the income statement +/- changes in accounts payable taxes +/- changes in
deferred taxes; other non-operating activities, Non-Op Act, non-operating activities as
measured as discontinued operations/special charges +/- foreign exchange gains/losses
+/- pension gains/losses/contributions; and Capex, capital expenditures. We deate all
of these variables by the book value of total assets. Other control variables include: log
(BVE/MVE), the natural logarithm of the ratio of the book value of equity to market value
of equity; log(ME), the natural logarithm of the market value of equity; r1,1 is the stocks
one-month-prior return; and r12,2 is the stocks prior years return skipping a month. We
winsorize all independent variables based on the rst and 99th percentiles. Adjusted R
2
is
the adjusted R-square.
(1) (2) (3) (4) (5) (6) (7) (8) (9) (10)
Net CF Ops 0.0153 0.0141 0.0171 0.0133 0.0181 0.0167 0.0151 0.0194
[3.22] [2.83] [3.64] [2.58] [3.69] [3.53] [2.87] [3.60]
CFOIM 0.0257
[3.71]
FCF 0.0077
[0.93]
Fin Act -0.0367 -0.0578 -0.0602 -0.0577 -0.0403 -0.0512
[-0.74] [-1.07] [-1.13] [-1.08] [-0.72] [-0.92]
Tax Act -0.0133 -0.0248 -0.0243 -0.0286 -0.0223 -0.0052
[-0.93] [-1.51] [-1.60] [-1.91] [-1.49] [-0.36]
Non-Op Act -0.0088 -0.0046 0.0025 -0.0157 -0.0233
[-0.82] [-0.45] [0.25] [-1.69] [-2.17]
Capex -0.0186 -0.02 -0.0215 -0.0065
[-1.89] [-2.03] [-2.18] [-0.55]
log(BE/ME) 0.002 0.0019 0.0019 0.0018 0.0021 0.0015 0.0013 0.0013 0.0013 0.0013
[1.71] [1.70] [1.52] [1.55] [1.73] [1.31] [1.15] [1.19] [1.10] [1.13]
log(ME) 0.0008 -0.0008 -0.0008 -0.0008 -0.0008 -0.0008 -0.0008 -0.0008 -0.0009 -0.0007
[-1.36] [-1.32] [-1.38] [-1.37] [-1.38] [-1.35] [-1.37] [-1.44] [-1.52] [-1.21]
r1,1 -0.024 -0.023 -0.024 -0.025 -0.024 -0.024 -0.024 -0.025 -0.025 -0.025
[-3.09] [-2.96] [-3.18] [-3.19] [-3.17] [-3.09] [-3.17] [-3.28] [-3.30] [-3.24]
r12,2 -0.0009 -0.0007 -0.0011 -0.0009 -0.001 -0.001 -0.001 -0.0014 -0.0014 -0.001
[-0.24] [-0.19] [-0.30] [-0.25] [-0.29] [-0.28] [-0.29] [-0.38] [-0.41] [-0.28]
Adjusted R
2
5.64% 6.17% 5.91% 5.98% 6.19% 6.49% 6.73% 7.29% 7.31% 7.31%
55