The impact of life cycle on the value-relevance of cash flows versus accrual financial information: An empirical study based on Tehran Stock Exchange

Article history: Received May 12, 2013 Received in revised format 30 June 2013 Accepted 28 July 2013 Available online July 31 2013 The purpose of this research is to determine the relationship between life cycle and cash flows of automotive and machinery industry among firms whose shares are accepted in Tehran Stock exchange. The multivariate linear regression is used and the classification is based on the applied researches. The study population consists of accepted automotive and machinery industries in Tehran Stock Exchange. According to limitation in population of study, the total population has been considered and because of the nature of this research, Eviews software is used. The results indicate that the effect of cash flows are superior to accrual financial information and by increasing of the company`s life cycle and entering to maturity and decline stages, the information of cash flows and accrual flows will reduce. © 2013 Growing Science Ltd. All rights reserved.


Introduction
One of the most important criteria on stock valuation is to predict return of a firm based on different criteria such as operating cash flow and accrual accounting information (Sugianis, 1996;Adizes & Naiman, 1988;Dechow & Skinner, 2000;Xu, 2007).In fact, precise information of return reduces the risk of investment in portfolio management and there are several studies in this area.Anthony and Ramesh (1992) performed an investigation to find out the relationship between accounting performance measures and stock prices based on different life cycle hypotheses.Chen et al. (2010) investigated whether the incorporation of corporate life cycle variables into the accrual model could improve the model's explanatory power.Results of the empirical study indicated that the inclusion of corporate life cycle variables could reduce the likelihood of both type I and II errors, and it could significantly improve the explanatory power of the accrual model.Jenkins et al. (2004) investigated the relative impacts of key components of earnings change in explaining the value relevance of earnings across various life-cycle stages of the company.They investigated whether firms in various life-cycle stages take various strategic actions: change in sales was emphasized in the growth and mature stages, while in later stages, profitability was emphasized.They reported that when firms were in the growth stage, the value-relevance of change in sales is relatively greater than that of change in profitability.Kallunki and Silvola (2008) investigated whether the use of an activity-based cost-accounting system differs among companies in various organizational life cycle stages.They applied the Miller andFriesen life cycle model (1983, 1984) internal characteristics of firms and the external contexts.They conduct different robustness checks of the results using several control variables and checking the effect of potential non-response bias.Stepanyan (2011) examined the emergence and evolution of three distinct groups of payers, companies that pay cash to shareholders in the form of (i) repurchases, (ii) dividends, and (iii) the combination of dividends and share buybacks, to recognize what determines firms' preferences for certain distribution techniques.The study indicated that the choice of the form of payout was a reflection of a life cycle stage and evolved as firms alternate between the introductory, growth and maturity stages of their life cycle.The findings implied that viewing paying population of industrial firms as a homogeneous group may be seriously flawed.Wang et al. (2011) examined the dividend policy for firms listed on the Taiwan Stock Exchange and tested the life cycle hypothesis.The sample involved 6031 observations of dividend payments over the period 1992-2007.The results stated that dividend payers were associated with higher profitability, higher asset growth rate, and higher market-to-book ratio than non-payers (none dividends).These results were consistent with the life cycle hypothesis of dividend payment because younger firms with higher growth potential but lower profitability would be more likely to distribute more stock dividends than cash dividends.

The proposed study
The purpose of this research is to determine the relationship between life cycle and cash flows of automotive and machinery industry among firms whose shares are accepted in Tehran Stock exchange.The multivariate linear regression is used and the classification is based on the applied researches.The study population consists of accepted automotive and machinery industries in Tehran Stock Exchange.According to limitation in population of study, the total population has been considered and because of the nature of this research, Eviews software is used.Anthony and Ramesh, (1992) performed an investigation on relationship between accounting performance measures and stock prices by testing the life cycle hypothesis.In their study, in order to categorize the life cycle, they used four financial ratios including sales growth, capital expenditures, ratio of dividend per share (DPS) on earnings per share (EPS) and size of companies.They measured these ratios in different cycles of firms and then using multiple regression method, they examined various hypotheses.Table 1 summarizes how we assign different numbers in various stages of firms based on their method, CE it =(Increase(reduction) on fixed assets during the cycle/Market value of firms)×100. (3) The proposed study uses the procedure described in Eqs.
(1-3) to categorize firms into different stages, which are growth, maturity and decline.According to Table 1, if the number obtained is between 16 to 20, the firm is considered in growth stage, if the number obtained is between 9 to 15, the firm is considered in maturity stage, the number obtained is between 1 to 8, the firm is considered in decline stage.The proposed model of this paper uses the following regression model to find the relationship between return and different cash flow components, , , , where , i t R represents return of i th share at time t, CFF are changes of the operating cash flow, cash flow from investment activities and cash flow from financial activities of i th share at time t from the previous year t-1.In addition, , i t PLF is a dummy variable, which is equal to one when NI, changes in the accrual operating activities, is less than equal zero and zero, otherwise.In addition, let ABI i,t be the changes in capital flows undertaking activities and ABF i,t be the changes in the accrual financing activities of i th share at time t from the previous year t-1.Therefore, we have, , , , The proposed study of this paper gathers the necessary data from Tehran Stock exchange over the period 2006-2011.There were some conditions in selection strategy: First, they must have the same fiscal calendar ending March.The shares of all eligible firms must be listed on stock exchange before year 2006, they were not permitted to change their fiscal year and finally, we must have the access to necessary data.Our survey has indicated that there were 40 firms and we decided to collect the necessary information of all these firms.The main hypothesis of the survey is as follows, Main hypothesis: There is a relationship between life cycle and cash flow information.
The main hypothesis consists of six sub-hypotheses as follows, 1.There is a relationship between growth cycle and operating cash flow.
2. There is a relationship between maturity cycle and operating cash flow.
3. There is a relationship between decline cycle and operating cash flow.
4. There is a relationship between growth cycle and accrual operating activities.
5. There is a relationship between maturity cycle and accrual operating activities.
6.There is a relationship between decline cycle and accrual operating activities.
Table 2 demonstrates the summary of some of the basic information.We have also measured some basic information in terms of different stages and Table 3 summarizes the results of our survey.The other useful information associated with the independent variables of the survey is the correlations among them.Table 4 summarizes the necessary information of correlations among various variables.As we can observe from the results of Table 4, there are not strong correlation among most of the independent variables, which means we may not face and linear dependency among these variables.

The results
In this section, we present details of our findings for testing various hypotheses of this survey.

The first hypothesis: The relationship between growth cycle and operating cash flow in growth cycle
The first hypothesis of this survey is associated with the relationship between growth cycle and operating cash flow.Table 5 summarizes the results of our findings on testing the first subhypothesis.

Table 5
The summary of testing the first hypothesis: The effect of cash flow on return during the growth cycle As we can observe from the results of Table 5, all coefficients are statistically significance in terms of t-value and P-value.In addition, the regression represents approximately 78% of the changes on return, which means cash flow is able to determine the return of a firm during the growth cycle much better than other stages.

The second hypothesis: The relationship between growth cycle and operating cash flow in maturity cycle
The second hypothesis of this survey is associated with the relationship between maturity cycle and operating cash flow during the maturity cycle.Table 6 summarizes the results of our findings on testing the second sub-hypothesis.

Table 6
The summary of testing the second hypothesis: The effect of cash flow on return during the maturity cycle As we can observe from the results of Table 6, all coefficients are statistically significance in terms of t-value and P-value.In addition, the regression represents approximately 34% of the changes on return, which means cash flow is able to determine the return of a firm during the maturity cycle stage.

The third hypothesis: The relationship between growth cycle and operating cash flow in decline cycle
The third hypothesis of this survey is associated with the relationship between decline cycle and operating cash flow during the maturity cycle.Table 7 summarizes the results of our findings on testing the third sub-hypothesis.As we can observe from the results of Table 7, most coefficients are not statistically significance in terms of t-value and P-value when the level of significance is one percent.In addition, the regression represents approximately 21% of the changes on return, which means cash flow is not able to determine the return of a firm during the decline cycle stage.

Table 7
The summary of testing the third hypothesis: The effect of cash flow on return during the decline cycle

The fourth hypothesis: The relationship between growth cycle and accrual operating activities in growth cycle
The fourth hypothesis of this survey is associated with the relationship between growth cycle and accrual operating activities.Table 8 summarizes the results of our findings on testing the fourth subhypothesis.

Table 8
The summary of testing the fourth hypothesis: The effect of accrual operating activities on return during the growth cycle As we can observe from the results of Table 8, the regression represents approximately 45% of the changes on return.However, most individual coefficients are not statistically significance, which means the model does not provide strong prediction of return.

The fifth hypothesis: The relationship between growth cycle and accrual operating activities in maturity cycle
The fifth hypothesis of this survey is associated with the relationship between growth cycle and accrual operating activities.Table 9 summarizes the results of our findings on testing the fifth subhypothesis.

Table 9
The summary of testing the fifth hypothesis: The effect of accrual operating activities on return during the maturity cycle As we can observe from the results of Table 9, the regression represents approximately 27% of the changes on return.However, some individual coefficients are not statistically significance, which means the model does not provide strong prediction of return.

The sixth hypothesis: The relationship between growth cycle and accrual operating activities in decline cycle
The sixth hypothesis of this survey is associated with the relationship between growth cycle and accrual operating activities.Table 10 summarizes the results of our findings on testing the last subhypothesis.

Table 10
The summary of testing the fifth hypothesis: The effect of accrual operating activities on return during the decline cycle As we can observe from the results of Table 10, the regression represents approximately 11% of the changes on return.However, none of the individual coefficients is statistically significance, which means the model does not provide strong prediction of return.

Conclusion
In this paper, we have investigated the relationship between operating cash flow as well as accrual accounting information with return of some selected firms on Tehran Stock Exchange.The proposed study of this paper gathered all the necessary information from the machinery sector and using regression analysis, we examined different hypotheses.Based on the results of our survey, we can conclude that operating cash flow is capable of predicting return very strongly during the growth stage but accrual information is not able to provide such prediction very well.


are coefficients, which are estimated using regression technique and , i t  represents the residuals.
In Table1, two variables sales growth (SG), capital expenditure (CE it ) and dividend per share (DPR) are calculated as follows,

Table 2
The summary of some statistical observations

Table 3
The summary of basic statistics associated with different stages

Table 4
The summary of Pearson correlation