The role of direct method operating cash flow disclosures in a voluntary setting

Abstract

This thesis aims to enhance our understanding of the direct method operating cash flow disclosures through three inter-related studies. The first study focuses on understanding various lobbying positions taken on the issue of mandating the direct method operating cash flow disclosures. Comment letters submitted in response to the joint Discussion Paper issued by the IASB and FASB in 2008 are collected and reviewed. These comment letters are submitted by various types of respondents from all over the world, allowing researchers to conduct an in-depth analysis on their lobbying positions. Results from this study highlight the tension among various interested parties, especially between preparers and users. Preparers are the most active group in the lobbying process and they overall strongly object to the mandating of the direct method disclosures. In contrast, responses from the smaller sample of users show an overall positive attitude toward the adoption of the direct method. The second and the third study explore the determinants and usefulness of the direct method operating cash flow disclosures in a voluntary setting (the U.S.). The net benefits of disclosure choice can be viewed with higher clarity in such a setting, permitting a direct study of the attributes of firms most likely to benefit from such disclosures. In the second study, I explore firm-level attributes or economic settings associated with voluntarily adopting firms. In the third study, I investigate whether the disclosed direct method components in this voluntary setting are relatively and incrementally useful beyond the estimated analogues in predicting future operating cash flows and earnings. I further explore whether any incremental usefulness of the disclosed components varies under the different settings identified in the second study. The second study finds that firms are more likely to adopt the direct method when they have higher leverage, lower discretionary accruals, longer operating cycles, less complex business operations, and when they operate in a less competitive market. Furthermore, results from the third study show that the disclosed direct method components of operating cash flows are incrementally more useful in settings where firms have higher incentives to adopt the direct method.