For our constant sample, we regress one-year-ahead cash flows on current
operating cash flows and current earnings by firm and subperiod:
, CFOt 1 0 1CFOt 2Et t (1)
where E is earnings before extraordinary items (#18), CFO is operating cash flows, and t
is the year subscript. Both E and CFO are scaled by average assets. For each firm we run
a time-series regression within each subperiod to estimate equation 1. We use 2 R1,p to
denote the R2
of equation 1 in subperiod p.
We then re-run equation 1 by including only CFO as the independent variable,