Dynamic linkages between stock prices, accrual earnings and cash flows: A cointegration analysis

This paper investigates the dynamic linkages between stock market prices, accrual earnings and cash flows using Finnish data. It is found that stock returns lead accounting returns rather than vice versa. Thus, the thin Finnish stock market appears to produce important information about the future success of Finnish companies for decision making purposes. In addition, the cointegration analysis performed here indicates that the inclusion of the so-called error correction term based on non-stationary price variables significantly improves the observed association between stock market and accounting variables. Thus, in future research, the long-term adjustment between stock market and accounting variables should be analysed more carefully when investigating the causality between accounting earnings and stock markets.