EARNINGS AND CASH FLOWS : THE IMPACT OF ASSET SALES

Abstract

This study presents empirical evidence from a sample of 44 Singaporean firms traded on the Singapore Stock Exchange to answer the following questions: (a) What is the impact of long-term asset sales on earnings and cash flow? (b) Do the majority of the companies in the sample show large discrepancy between cash and earnings generated from asset sales and, if there are any, which firms in the sample are the main reason behind this large discrepancy? ( c) What is the correlation between earnings and cash flows generated by asset sales? The Singapore Accounting Standards provide the rules specifying the impact of long-term asset sales on the financial statements. The evidence shows that the majority of companies in the sample do not have large discrepancy between cash and earnings from asset sales. However, a small number of companies do have very large discrepancy between cash and earnings. Previous studies have shown that there is a high correlation between earnings and traditional cash flow measures and low correlation between earnings and more refined cash flow measures. This study provides evidence that the earnings and cash flows from asset sales are highly correlated.