The Decision Usefulness of Reported Cash Flow and Accrual Information in a Behavioural Field Experiment

Posted: 28 Sep 2003

See all articles by Divesh Sharma

Divesh Sharma

Kennesaw State University, School of Accountancy

Errol R. Iselin

Griffith University, Nathan Campus

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Abstract

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 judgements using either cash flow cues or accrual cues. We found that, as hypothesized, judgements based on cash flow information were more accurate than judgements based on accrual information. The difference in judgement 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.

Keywords: decision usefulness, information content, accrual information, cash flow, judgement

JEL Classification: M41, M45, G12, C53, C90

Suggested Citation

Sharma, Divesh Shankar and Iselin, Errol R., The Decision Usefulness of Reported Cash Flow and Accrual Information in a Behavioural Field Experiment. Available at SSRN: https://ssrn.com/abstract=446200

Divesh Shankar Sharma (Contact Author)

Kennesaw State University, School of Accountancy ( email )

Kennesaw, GA 30144
United States

Errol R. Iselin

Griffith University, Nathan Campus ( email )

Kessels Road
Faculty of Commerce & Management
Nathan, Queensland 4111
Australia
+61 07 387 57112 (Phone)
+61 07 387 57760 (Fax)

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