The Effects of Operating Cash Flow, Sales Volatility, and Leverage on Earnings' Persistence

Headnote

ABSTRACT

This study investigates the effect of operating cash flow, sales volatility, and leverage on earnings persistence. cash flow volatility is costly as it affects a firm's investment policy by increasing both the likelihood and the costs of raising external capital. However, earnings volatility is also negatively associated with firm value. Sample of this study consisted of 42 manufacturing companies listed in Indonesia Stock Exchange from 2013 to 2015 with sampling method. The analysis method used in this research is multiple regression method. The results indicated that the operating cash flow and leverage have a significant effect to earnings persistence, while sales volatility has no significant effect to earnings persistence.

JEL Classification: C58; M41.

Keywords: Earnings Persistence; Operating Cash Flow; Sales Volatility; Leverage.

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1.INTRODUCTION

The financial statements produced by the company is the basis for investors and other interested users to assess the performance of the company and make decisions like investment decisions, the determination of management compensation decisions, and dividend distribution decisions. One part of the financial statements that became the center of attention of the users of financial statements is earnings. Earnings is one of the important indicator to measure the performance of companies. Companies and users of financial statements, believe that achievement of high earnings is not enough for them, because, earnings should also be persistent in order to provide reliable information. Earnings persistence was the profit that can be used as an indicator of future earnings. The persistence of a sustainable profit expressed as profits, have high quality; otherwise if unusual profit expressed as profits, they have poor quality (Penman and Zhang, 2002). Earnings persistent is earning which tends to unfluctuated and sustainable for a long period. Earnings persistence becomes an important issue used by investors and creditors as a basis for making economic decisions like in the contracting decision, investment decision, and others (Schipper and Vincent, 2003). If investors assessing company earnings higher than the performance of managers, it will encourage excessive compensation to the managers. If earnings become overestimated, it will be ables to cover the company's ability to repay their loan, so, it will lead to misleading information to creditors (Fanani, 2010).

By knowing the level of earnings persistence, it can be...