The importance of cash flow disclosure and cost of capital

Richard Anthony Kent and Di Bu

Accounting and Finance, 2020, vol. 60, issue S1, 877-908

Abstract: We examine whether the choice of cash flow disclosure under International Accounting Standard 7 has an influence on the cost of capital incurred by Australian listed companies. Results indicate that indirect method companies incur a significantly higher ex‐ante cost of equity than direct method companies using a combined equity model approach. We also demonstrate that using an optimal weighted combination of equity models reduces model variance and bias compared to using a single equity model. Our findings support mandating the direct method and have the potential to induce companies to report the direct method to increase company value.

Date: 2020
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https://doi.org/10.1111/acfi.12382

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Persistent link: https://EconPapers.repec.org/RePEc:bla:acctfi:v:60:y:2020:i:s1:p:877-908

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