Abstract

This study examines the value relevance of banks’ cash flows from operations. While banks are required to provide statements of cash flows under Generally Accepted Accounting Principles (GAAP), banks have long argued that cash flow information is not useful for the banking industry. Using a sample of banks from 2004 to 2014, we find that banks’ cash flows from operations are predictive of future earnings and cash flows. Applying a modified Ohlson’s (1995) valuation model, we document that banks’ cash flows from operations are positively and significantly associated with share prices. Furthermore, we find the usefulness of banks’ cash flows to vary depending on three important bank characteristics: profitability, capital adequacy, and credit risk. Taken together, these findings suggest that banks’ cash flows from operations provide useful information to investors in valuing banks’ equity. This study contributes novel empirical findings that enhance our understanding of the predictive ability and valuation usefulness of banks’ operating cash flows.

Introduction

In 1948 The World Health Organization (WHO) originally proposed that, “Health is not the mere absence of diseases but a state of well-being” and from this point onward well-being has become a challenging concept to define (La Placa & Knight, 2014). Notwithstanding, well-being has been described in numerous ways such as an individual’s optimistic assessment of their lives including contentment, positive emotion, engagement and purpose (Diener & Seligman, 2004). It has also been explained in terms of developing as a person, being fulfilled and making a contribution to the community (Stoll, Michaelson, & Seaford, 2012). While the WHO’s description of health is not a definition of well-being per se; it outlines fundamental principles and demonstrates where the concept originates. Issues such as the association between health and well-being and whether or not well-being should be considered subjective or objective in nature contribute to the contemporary evaluation of well-being from both an economic and psychological viewpoint. Well-being has been used in a broad sense by philosophers, economists and public health professionals to discuss the general population and has also been understood in a narrow sense regarding an individual’s positive functioning. Even so, the concept of well-being extends across a wide range of subject areas including philosophy, public health, economics, policy, academia, research, theory and psychology (Hanlon, Carlisle, & Henderson, 2013); however, it is used sparsely in relation to tourism. It can be conceptualized as resting on a continuum between ‘reactive’ and ‘proactive’ anchors. With regard to this research well-being fits within the proactive conceptualization, as tourism can be considered healthful in nature and guided by the individual (Travis & Ryan, 1981).