This study examines whether the associations between stock returns and earnings, and stock returns and cash flows from operations (OCF), vary during periods of firm-specific financial distress. We find that a firm's stock returns are more strongly associated with its OCF than its earnings when the firm is in financial distress. In a regression of stock returns on both OCF and earnings, and interactions of these two variables with an indicator for financial distress, the Shapley value, which measures contribution to the regression R2, is higher for the interaction of OCF with distress than for the interaction of earnings with distress. We also find that the strength of the observed return-OCF relation increases in a market-wide crisis. These findings support the view that investors, in times of firm distress, place significantly more weight on OCF information than on earnings information.
JEL Classifications: G01; G10; M41.
Data Availability: Data used in this study are available from public sources identified in the study.