The Relationship between Earnings Before Interest and Tax and Operating Cash Flow and Stock Return in Information Asymmetry Conditions at Pharmaceutical Companies of Abidi and DarouPakhsh Applying Markov-Switching Approach

One of most fundamental economic issues is optimal resource allocation towards productive investment with rational risk-taking. In doing so, there is a need to performance evaluation indices, some of which emphasize upon cash flow variables and some others upon information contents of accounting earning. Therefore, it is tried to consider the relationship between earnings before interest and tax and operating cash flow and shareholders return at pharmaceutical companies of Abidi and DarouPakhsh. Then this relationship was tested in conditions of information asymmetry. In order to test hypotheses, nonlinear Markov-switching was applied. Results obtained from experimental tests using relating information from 2002 to 2011 indicate that independent variable of earnings before interest and tax has no significant relationship with stock returns of two companies. In other words, earnings before interest and tax have information content toward operating cash flow. Also by increasing information asymmetry it was observed that variable of earnings before interest and tax have more correlation with companies’ stock return towards variable of operating cash flow. In other words, in conditions of information asymmetry, accrual variables have more information content towards variables of cash flow.

INFORMATION ASYMMETRY, ACCRUALS, CASH FLOW, TOTAL SHAREHOLDERS RETURN, MARKOV-SWITCHING APPROACH