The Usefulness of Aggregated and Disaggregated Cash Flows in Signaling Financial Distress

Posted: 17 Apr 1998

See all articles by Terry J. Ward

Terry J. Ward

Middle Tennessee State University

Benjamin P. Foster

University of Louisville

Date Written: March 20, 1998

Abstract

This study compares the incremental usefulness of aggregated net and disaggregated gross cash flows in signaling future firm financial distress. Our study extends previous research because we used actual reported, rather than estimated, cash flows. This study examines a sample of nondistressed firms and firms that became financially distressed in 1991 and 1992 to generate logistic regression models. Logistic regression models were generated to predict a separate holdout sample of 1993 firms. Results show that cash flows have incremental usefulness in explaining financial distress. However, aggregated net cash flows do not capture all the information provided by disaggregated gross cash flows. The only aggregated cash flow useful in signaling future financial distress is net cash flow from operating activities. Several disaggregated gross cash flows are also useful in signaling future financial distress. The two most important disaggregated gross cash flows in signaling future financial distress are taxes paid and interest paid.

JEL Classification: M41, G33

Suggested Citation

Ward, Terry J. and Foster, Benjamin P., The Usefulness of Aggregated and Disaggregated Cash Flows in Signaling Financial Distress (March 20, 1998). Available at SSRN: https://ssrn.com/abstract=77028

Terry J. Ward (Contact Author)

Middle Tennessee State University ( email )

P.O. Box 50
Murfreesboro, TN 37132
United States
615-898-2341 (Phone)
615-898-5045 (Fax)

Benjamin P. Foster

University of Louisville ( email )

School of Accountancy, College of Business
University of Louisville
Louisville, KY 40292
United States
5028524826 (Phone)
502-852-6070 (Fax)

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