The Decision Usefulness of Reported Cash Flow and Accrual Information in a Behavioural Field Experiment
Florida International University
Errol R. Iselin
Griffith University, Nathan Campus
While recent capital market studies tend to reveal some information content in cash flows, their results may not be generalizable to other contexts such as the assessment of solvency. Mandated accounting standards on cash flow emphasize the relevance of cash flow data for assessing solvency. However, there is a paucity of research that specifically investigates this contention. Accordingly, this study investigates the decision usefulness of reported cash flow and accrual information in a behavioural field solvency assessment experiment. Using a two-group between-subjects field experiment design, bankers with at least three years corporate lending experience made solvency judgements using either cash flow cues or accrual cues. We found that, as hypothesized, judgements based on cash flow information was statistically significantly more accurate than judgements based on accrual information. The difference in judgement accuracy was large with very high statistical power. Our results imply that cash flow information has greater decision usefulness than accrual information for assessing corporate solvency. Our results support the decision of accounting regulators world-wide to mandate the statement of cash flows and are consistent with the normative arguments of proponents of cash flow reporting.
JEL Classification: M41, M45, C53, C90working papers series
Date posted: November 10, 2000
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