One of the major objectives of financial reporting is to provide useful information to thecapital market participants for investing, credit and managerial decisions. Empirical capitalmarkets research examined extensively the type of financial information that could be usefulin explaining security returns. The evaluation of earnings usefulness in the capital marketshas been among the primary empirical questions raised in several studies in the past threedecades.Using more than 40,000 firm year observations from Anglo Saxon and code law countries,we examine empirically the role of earnings and cash flows in explaining security returns.Results support our hypotheses that capital markets value earnings and cash flowsdifferently in Anglo Saxon countries than in Code Law countries. Results show that bothearnings and cash flows are valued in the marketplace but their valuation is country specific.Specifically, results show that earnings are valued more in Code Law countries and less inthe Anglo-Saxon countries, due to the fact that the financial reporting in the Anglo-Saxoncountries is much more conservative and managers may manipulate easier financialinformation. On the other hand, as hypothesized, results show that cash flows are the mostvalue relevant in Anglo Saxon countries and the least value relevant in Code Law countries.In addition results show that the longer the return window the greater the value relevance ofearnings and cash flows.
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