The first set of analyses focuses on firms’ classification choices and the effect on reported OCF. Results indicate that reported OCF tends to be higher under IFRS than it would have been under U.S. GAAP. S. GAAP differ significantly.
We examine incentives to inflate reported OCF, similar to the work of Lee (2012), including capital market incentives, financial distress, the presence of analysts’ cash flow forecasts, and profitability. Furthermore, we explore characteristics associated with the reporting environment, such as analyst following, classification choices of industry peers, cross-listing in the U.S., country, and industry.
The pair-wise means, by firm, for the three cash flow amounts under IFRS versus U
In our determinants analysis, we construct two dependent variables as proxies for OCF-increasing classification choices: (1) the amount of the difference in reported OCF under IFRS and a benchmark measure of what OCF would have been under U.S. GAAP and (2) an indicator variable signifying a classification choice that would increase OCF under IFRS relative to U.S. GAAP. For the first of these variables, we create a hypothetical benchmark payday loans with no credit check in Springfield TN by adjusting each firm’s OCF to include interest paid, interest received, and dividends received (i.e., consistent with U.S. GAAP requirements). That is, we consider a hypothetical U.S. GAAP benchmark, assuming that managers’ real operating activities would have remained the same even if cash-flow classification choices had been restricted. We do not assert these items are appropriately classified as OCF. Rather, we use U.S. GAAP classification as a benchmark because our main focus is on the differences between U.S. GAAP and IFRS. For the second of these dependent variables, we focus on the classification choice for one item, interest paid, which IFRS permits to be classified either in the operating or the financing section of the statement of cash flows. We focus on interest paid because it usually constitutes a relatively large amount relative to interest received and dividends received, is commonly reported, is typically reported separately, and is thus easier to identify. A firm ount and timing of cash outflows (i.e., payments), as opposed to cash inflows (i.e., receipts), thus making interest paid more susceptible to use as an OCF-increasing item. Footnote 5 When a firm classifies interest paid as financing, it follows that, ceteris paribus, reported OCF will be higher than if interest paid had been classified as operating. Thus classification of interest paid as financing is an OCF-increasing classification choice.
A cross-sectional determinants analysis of all firms with consistent classification during the study period indicates that actually reported OCF exceeds benchount for firms with weaker financial positions (i.e., greater likelihood of financial distress, higher leverage, and lower profitability). Firms with higher amounts of equity-raising activity also make greater OCF-increasing classification choices. For the determinants analysis using an indicator variable signifying classification choice, we find that firms with higher leverage are more likely to make an OCF-enhancing choice and firms cross-listed in the United States are more likely to make a classification choice that is consistent with U.S. GAAP. We find no effects related to homogeneity of industry practice or to the presence of analysts’ cash flow forecasts.
The second set of analyses focuses on determinants of firms’ cash-flow classification choices from the perspective of OCF-increasing classifications
An examination of 99 firms that change classifications during our sample period reveals that 58% make OCF-increasing classification choices. The most common change is a reclassification of interest paid out of operating, an OCF-increasing choice. Analysis indicates that an OCF-increasing reclassification is more likely for firms with greater equity issuance and less likely for firms with more analyst coverage, homogeneity of industry practice, and a cross-listing in the U.S.