Denote the R2
from equation 2 for subperiod p, as 2 R2, p and define . 2
2,
2 FCFOp R1, p R p
FCFO represents the incremental contribution of earnings in explaining future cash flows
for firm i in subperiod p. We use FCFO as our primary measure of cash flow
predictability (relevance).12
For our full sample, we use a cross-sectional approach consistent with prior
research methods (e.g., Collins et al., 1997; Kim and Kross, 2005). To estimate the value