Why Do Managers Voluntarily Issue Cash Flow Forecasts?

Charles E. Wasley and Joanna Shuang Wu

Journal of Accounting Research, 2006, vol. 44, issue 2, 389-429

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 precommit 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 when the firm is young. 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 firms' disclosure of different financial information.

Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:bla:joares:v:44:y:2006:i:2:p:389-429

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Journal of Accounting Research is currently edited by Philip G. Berger, Luzi Hail, Christian Leuz, Haresh Sapra, Douglas J. Skinner, Rodrigo Verdi and Regina Wittenberg Moerman

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