The aim of this article is to test the usefulness of cash flows as a
measure of companies' financial health. Our approach is different from the
previous studies which have animated the debate on the comparison of the
explanatory power between accrual and cash-flow. Indeed, we use current
developments in cointegration tests on non-stationary dynamic panel data to
test the existence of a long-run equilibrium relationship between a ratio based on cash flows (i.e.,
operating cash flow to total assets ratio) and four financial ratios based on
accounting data, namely: working capital to total assets ratio, asset turnover ratio, return on assets
ratio, and debt-assets ratio. These four financial ratios are commonly known as
relevant indicators regarding the company's financial health regarding its
liquidity, operational efficiency profitability, and solvency.
Precisely, the panel unit root tests (Im, Pesaran, and Shin (2003)) and the panel cointegration tests (Pedroni
(2004)) are applied on a sample of 150 American firms over the period
2010-2017. Our main results led to conclude that the cash flow has an
informational content and a significant explanatory power in the prediction of
the company’s financial health. We provide some explanations for these findings
which are supported by a robustness analysis using panel error correction
JEL classification numbers: G30, G33, L25, M10.
Keywords: Cash flows, Accruals, Financial
health, Explanatory power, Panel cointegration tests.