Why Do Managers Voluntarily Issue Cash Flow Forecasts?

59 Pages Posted: 28 Jan 2005  

Charles E. Wasley

Simon School, University of Rochester

Joanna S. Wu

University of Rochester - Simon Business School

Multiple version iconThere are 2 versions of this paper

Date Written: July 2005

Abstract

We study a relatively recent change in voluntary disclosure practices by management, namely the issuance of cash flow forecasts. We predict and find that management issues cash flow forecasts to signal good news in cash flow, to meet investor demand for cash flow information, and to pre-commit to a certain composition of earnings in terms of cash flow versus accruals, thus reducing the degree of freedom in earnings management. Our results also suggest that management discloses good news in cash flow to mitigate the negative impact of bad news in earnings, to lend credibility to good news in earnings and to signal economic viability for young firms. Our finding that management cash flow forecasts primarily convey good news is in contrast to the generally negative nature of management earnings guidance and suggests that different incentives drive firm disclosure of different financial information.

Keywords: Voluntary Disclosure, Managment Forecasts, Cash Flow Forecasts

JEL Classification: M41, M45, K22

Suggested Citation

Wasley, Charles E. and Wu, Joanna, Why Do Managers Voluntarily Issue Cash Flow Forecasts? (July 2005). Simon School Working Paper No. FR 05-04. Available at SSRN: https://ssrn.com/abstract=655881 or http://dx.doi.org/10.2139/ssrn.655881

Charles E. Wasley

Simon School, University of Rochester ( email )

Rochester, NY 14627
United States
585-275-3362 (Phone)
585-442-6323 (Fax)

Joanna Wu (Contact Author)

University of Rochester - Simon Business School ( email )

Carol Simon Hall 3-160D
Rochester, NY 14627
United States
585-275-5468 (Phone)
585-442-6323 (Fax)

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