Informational and Agency Issues Related to Operating Cash Flows Models: An Empirical Comparison on S&P500 Companies Financial Reports

38 Pages Posted: 18 Sep 2019

See all articles by Yoann Martin

Yoann Martin

Université Paris-Dauphine, PSL Research University

George Emmanuel Iatridis

University of Thessaly - Department of Economics

Date Written: September 5, 2019

Abstract

Operating cash flows and their models are crucial for companies, from day-to-day operations to investment decisions. We study the possible issues with the quality of the information provided by current cash flow models in the context of economic decision-making, from the agency theory perspectives of insiders and outsiders. We analyze these questions by testing the preeminent indirect model of operating cash flows, against an analytical model directly based on accounting.

We compare both and show how the analytical model succeeds to generalize the indirect model, through a more complete description of economic activities. This advantage enables potential significant gains in terms of knowledge about CFs. Therefore, we compare both models’ ability to describe S&P500 companies’ receivables time series, as a simple fundamental element to operating cash flows.

We observe indeed significantly higher correlation and accuracy with the analytical model, generalizing the indirect model and we show how the way to convey economic information may have an impact on real economic decisions. We contribute also to identify, with both models, an information asymmetry between outsiders and insiders related to the frequency of financial publication. Higher frequency (quarters) reveals a more accurate picture reducing the gap with insiders, of interest to regulators.

Keywords: Cash flows, Models, Agency theory

Suggested Citation

Martin, Yoann and Iatridis, George Emmanuel, Informational and Agency Issues Related to Operating Cash Flows Models: An Empirical Comparison on S&P500 Companies Financial Reports (September 5, 2019). Proceedings of the Ninth International Conference on Engaged Management Scholarship (2019), Available at SSRN: https://ssrn.com/abstract=3454107 or http://dx.doi.org/10.2139/ssrn.3454107

Yoann Martin (Contact Author)

Université Paris-Dauphine, PSL Research University ( email )

France

George Emmanuel Iatridis

University of Thessaly - Department of Economics

Volos 38221
Greece

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