While recent capital market studies tend to reveal some information content in cash flows, their results may not be generalisable to other contexts such as the assessment of solvency. Mandated accounting standards on cash flow emphasise the relevance of cash flow data for assessing solvency. However, there is a paucity of research that specifically investigates this contention. Accordingly, this study investigates the decision usefulness of reported cash flow and accrual information in a behavioural field solvency assessment experiment. Using a two-group between-subjects field experiment design, bankers with at least three years corporate lending experience made solvency judgments using either cash flow cues or accrual cues. We found that, as hypothesised, judgments based on cash flow information were more accurate than judgments based on accrual information. The difference in judgment accuracy was more pronounced for insolvent (failed) companies than for solvent (non-failed) companies. This observation suggests that cash flow information is more decision useful for firms experiencing financial distress. Our results therefore imply that cash flow information has greater decision usefulness than accrual information for assessing corporate solvency and support the mandate of the Statement of Cash Flows. Our results also support the normative arguments of proponents of cash flow reporting.
© Copyright Accounting & Business Research, 2003
- cash flow,
- capital market,
Available at: http://works.bepress.com/divesh_sharma/6/