Results

Table 4 reports the primary results of the study. In general, the model fit is similar to that obtained in prior studies, as Eq. (1) generates a coefficient for current period CFO of 0.752, and an adjusted R2 value of approximately 46%. The model used by Dechow and Ge (2006, 271) generates a coefficient for current period CFO of 0.828 with an adjusted R2 value of approximately 36%. It is worth noting that the current study includes lagged values for cash flows and accruals as additional explanatory variables, where Dechow and Ge (2006) do not include these variables in the model specification. The current study also utilizes an explicit control for firm size, as well as fixed effects for industry, where the study conducted by Dechow & Ge, 2006 P. Dechow and W. Ge, The persistence of earnings and cash flows and the role of special items: Implications for the accrual anomaly, Review of Accounting Studies 11 (2–3) (2006), pp. 253–296. Full Text via CrossRef | View Record in Scopus | Cited By in Scopus (15)Dechow and Ge (2006) does not include the firm size control or the fixed effects for industry. Overall, the model fit in Table 4 is reasonably consistent with the results reported in the literature.
The results in Table 4 indicate that the coefficients for operating cash flows and operating accruals for foreign firms (i.e. λ3 for CFO_FPI and λ4 for ACR_FPI) are both significantly different from zero. For example, the coefficient for CFO_FPI (λ3) is − 0.033, and generates a significant t-statistic of − 1.896, which is significant at the 5.9% level. This indicates that the persistence of operating cash flow for FPIs for the current period is significantly less than the persistence of operating cash flow for U.S. firms. The coefficient for ACR_FPI (λ4) is − 0.041, and generates a significant t-statistic of − 2.511, which is significant at the 1.2% level. This indicates that operating accruals are significantly smaller for FPIs for the current period than the accruals for U.S. firms, and is consistent with FPIs representing larger firms with more depreciable fixed assets, and more depreciation expense (which is an operating accrual with a negative sign) than the representative U.S. firm. The coefficient for firm size (i.e., λ8 = 0.008) is positive and significantly different from zero (t-statistic = 14.240, p-value less than 0.0001), while the coefficient for the differential intercept associated with FPIs is insignificantly different from zero (i.e., λ8 = 0.000, t-statistic = 0.072, p-value = 0.942).

Overall, the significance of the coefficients for CFO_FPI and ACR_FPI supports the primary hypothesis of the study, which is that the persistence of operating cash flows and operating accruals differ between U.S. and non-U.S. firms.