Predicting the Future Accounting Earnings: Empirical Evidence from the Palestine Securities Exchange

Abstract

This research comes as an effort to explore the role of past year earnings and operating cash flows in predicting the future (current) earnings using the time series data of the listed companies in the Palestine Securities Exchange (PSE). Also, this investigation examines the comparative usefulness of past earnings and operating cash flows variables in predicting the future performance of a firm. Additionally, this manuscript aims at deriving econometric forecasting model from the Palestinian economical environment. In order to achieve the previous objectives, the study requires exploiting the accounting data of the listed corporations in the Palestinian Securities Exchange from 2004 to 2011. Moreover, the study employs a variety of statistical procedures (descriptive analysis, regression analysis, Akaike Info Criterion, Schwarz Criterion, autoregressive [AR1] and autoregressive [AR2]). What's more, 16 listed Palestinian corporations (10 industrial and 6 service firms) were selected to examine the hypotheses [128 firm - year]. The findings of this paper specify that the previous year earnings have a potent role in predicting the future earnings for the listed companies in the Palestine Securities Exchange whereas the previous year operating cash flows are irrelevant. Additionally, the autoregressive first order and second order models are useful for forecasting the future performance of a firm. Furthermore, the AR (2) model is better than the AR (1) model. Also, the Akaike Info criterion and the Schwarz Criterion tests of model selection prove that the previous year earnings are the strongest variable of predicting the future performance. At last but not least, this study recommends the decision makers in Palestine to depend on the historical data of performance for expecting the future.

Keywords: Forecasting, Palestine Securities Exchange, Earnings, Time Series, forecasting models, Autoregressive.