Foreign Monitoring and Predictability of Future Cash Flow

• Main Authors: Jaehong Lee, Eunsoo Kim
• Format: Article
• Language: English
• Published: MDPI AG 2019-09-01
• Series: Sustainability
• Subjects: foreign investors’ ownership; earnings; cash flows; predictability of future cash flows
• Online Access: https://www.mdpi.com/2071-1050/11/18/4832

A company’s sustainability is generally determined by whether it is able to create a positive long-term cash flow. This paper investigates whether the predictive ability of cash flows and earnings in forecasting future cash flows differs depending on the foreign investors’ ownership. Based on firms listed in the Korea Stock Exchange market from 2000 to 2017, we find that earnings and cash flow components of financial statements enhance the predictability of future cash flow in the Korean stock market. Conversely, foreign investors showed a tendency to decide on investments based on operating cash flow instead of earnings when predicting future cash flow. These findings indicate that reliability towards earnings may fall since foreign investors’ concerns are on the prospects of earnings management. These results were strengthened by the addition of several more analyses including cluster analyses, consideration of information asymmetry and the chaebol governance.