Do voluntary cash flow disclosures and forecasts matter to value of the firms?

Abstract

Purpose

Two stylized facts emerge from cash flow literature. One explores the link between free cash flow (FCF) to firm value (Jensen, 1986) and establishes that FCF increases firm value. The other posits FCF may be value decreasing as firms tend to over invest when there is high level of FCF (Richardson, 2006). Two camps have opposing views yet together they establish that FCF is value relevant. If FCF or cash flow, in general, is value relevant then managers will be motivated to present forecasts to investors. The paper aims to discuss these issues.

Design/methodology/approach

The authors hand collect data from each firm’s press releases and earnings announcements and perform an event study around this date to see how firm forecast and disclosure policies affect firm value.

Findings

The analysis demonstrates that disclosures and forecasts do have significantly positive relation with tech firms suggesting that firms in the technology industries are more forthcoming with cash flow disclosures and forecasts in their earnings announcements. The authors further show that these disclosures and forecasts negatively affect the firm value of tech firms.

Originality/value

This paper contributes to the literature that there is empirical evidence that cash flow disclosures and forecasts matter to the value of the firm. Further, it posits that unlike understanding the existing views as opposing each other, may be the authors will be better served if they view both of them as right depending on the optimality of forecasts. The future efforts will be directed toward exploring the optimality of cash flow disclosures.

Citation

Hoque, M. and Rakow, K. (2015), "Do voluntary cash flow disclosures and forecasts matter to value of the firms?", Managerial Finance, Vol. 42 No. 1, pp. 3-12. https://doi.org/10.1108/MF-09-2015-0253