Economic determinants and consequences of direct method cash flow disclosure

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2012-05
Authors
Zhao, Lijuan
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[Honolulu] : [University of Hawaii at Manoa], [May 2012]
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The statement of cash flows of a business can be presented by using either the direct method (DM) or the indirect method (IM). In United States, only a small portion of businesses use the DM. Compared to the IM, the DM has been shown to provide incremental information in predicting future cash flows. Furthermore, the DM can also improve the ability to compare the individual component of cash receipts and cash payments among similar companies over a period of time. However, the direct method is more costly to implement. Given the high costs associated with the DM, why do some firms continue to use the DM? What are the benefits in choosing the DM? This study investigates how firms choose between the DM and the IM. In order to answer this question, this study explores the economic determinants and consequences if firms adopt the DM instead of the IM. This study finds that firms choosing the DM tend to (1) be in high tech industries, (2) be in relatively less competitive industries, (3) have higher leverage ratio and (4) have higher earnings quality. This study further explores the possible consequences if firms select the DM. The results indicate that analysts' cash flow forecasts are more accurate for firms employing DM than those using IM to present the statement of cash flows. Finally, this study shows that firms with the DM cash flow disclosure will have lower cost of debt in comparison to those choosing the IM. This study provides comprehensive empirical evidence about the determinants and consequences of firms' decisions of using DM. This study contributes to the current literature in identifying the underlying reasons behind in the selection process among the two methods.
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Ph.D. University of Hawaii at Manoa 2012.
Includes bibliographical references.
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cash flow, direct method, indirect method, international management
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Theses for the degree of Doctor of Philosophy (University of Hawaii at Manoa). International Management.
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