The Determinants and Valuation Effects of Classification Choice on the Statement of Cash Flows

Accounting and Business Research, Forthcoming

55 Pages Posted: 2 Nov 2017

See all articles by Andreas Charitou

Andreas Charitou

University of Cyprus

Irene Karamanou

University of Cyprus - Department of Public and Business Administration

Anastasia Kopita

University of Warwick - Warwick Business School; University of Essex

Date Written: September 29, 2017

Abstract

In this paper we exploit the choice allowed by IFRS regarding the presentation of interest payments on the cash flow statement to answer two related questions: First, whether the classification choice is explained by firm reporting incentives and second, whether it is value relevant. Using a UK sample, we find that firms reporting losses, with a greater proportion of their debt stemming from public sources, with CFO-based covenants and greater increases in leverage in the year of adoption are less likely to report interest payments in cash flows from operating activities (CFOA). Results also suggest that the incentive to meet or beat analyst CFO forecasts decreases, but strong corporate governance increases the probability of including interest payments in CFOA. Based on the assumption that the decision not to classify interest payments in CFOA captures lower disclosure quality or poor future expected performance, we posit that these firms should also exhibit lower valuations. Results obtained after correcting for self-selection bias confirm this assertion. We conclude that managers’ decision not to classify interest payments in CFOA is consistent with the opportunistic use of the choice allowed by IFRS.

Keywords: IFRS, Cash flow statement, classification choice, firm reporting incentives

Suggested Citation

Charitou, Andreas and Karamanou, Irene and Kopita, Anastasia, The Determinants and Valuation Effects of Classification Choice on the Statement of Cash Flows (September 29, 2017). Accounting and Business Research, Forthcoming. Available at SSRN: https://ssrn.com/abstract=3062555

Andreas Charitou

University of Cyprus ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
Cyprus
+357 2 893624 (Phone)
+357 2 895030 (Fax)

Irene Karamanou

University of Cyprus - Department of Public and Business Administration ( email )

75 Kallipoleos Street
P.O. Box 20537
Nicosia CY-1678
CYPRUS
+357 2 892471 (Phone)
+357 2 892460 (Fax)

Anastasia Kopita (Contact Author)

University of Warwick - Warwick Business School ( email )

Coventry CV4 7AL
United Kingdom

University of Essex ( email )

Wivenhoe Park
Colchester, CO4 3SQ
United Kingdom

Register to save articles to
your library

Register

Paper statistics

Downloads
67
rank
331,467
Abstract Views
623
PlumX Metrics
!

Under construction: SSRN citations will be offline until July when we will launch a brand new and improved citations service, check here for more details.

For more information