The current issue and full text archive of this journal is available at www.emeraldinsight.com/0114-0582.

htm

Australasian cash ow reporting regulation: value relevant?

Christopher B. Malone and Udomsak Wongchoti
College of Business, Massey University, Palmerston North, New Zealand, and

Australasian cash ow reporting 345

Alan J. Mitchell
Air New Zealand, Auckland, New Zealand
Abstract
Purpose This paper provides empirical support for the introduction of cash ow disclosure regulation issued by Australasian accounting bodies, AASB and NZICA (formerly NZSA), between 1987 and 1992. Design/methodology/approach The empirical analysis uses a long window event study format on a panel of 5,368 rm-year observations between 1996 and 2005. Findings The cash ow disclosures required in the regulation are associated with signicant abnormal return responses. These effects are robust to the inclusion of other factors linked to abnormal returns such as movements in protability, size and leverage. We also nd support for the proposition that the cash ow effects are conditioned on the quality of the rm, as proxied by q. The market is better and more easily informed with the information required under the revised reporting regime. Research limitations/implications The analysis would have been improved with better access to pre-reform period data. Originality/value There is no other study on Australasian markets which looks at the value impacts of cash ow information in relation to this regulatory change. Such a study has also never been done on New Zealand companies. Keywords Australia, New Zealand, Regulation, Disclosure, Accounting regulation, Cash ow, Value impact, Australasian shares Paper type Research paper

1. Introduction At the end of the 1980s and beginning of the 1990s, a number of countries including the USA, Canada, Australia, New Zealand, and the UK, through their respective accounting bodies required reporting entities to provide information on cash ows as a part of the nancial statement reporting process. This study is an examination of the effectiveness of these initiatives in two of these countries, Australia and New Zealand. Studies by Garrod and Hadi (1998) and Livnat and Zarowin (1990), amongst others, have established links between cash ow data and wealth effects in the USA and the UK, respectively, but it is useful to document the impacts of the information required in the accounting reforms in Australia and New Zealand. First, it has been observed by Chan et al. (2005) that there can be difculty in generalising US results to other market settings. Second, while Cotter (1996) has shown that cash ow data are value relevant in Australia in the period before the cash ow regulation, her results in the investing
JEL classication G14, G15 The authors thank Tim Riddiough, Glenn Boyle, and three anonymous referees for helpful comments.
Pacic Accounting Review Vol. 23 No. 3, 2011 pp. 345-367 q Emerald Group Publishing Limited 0114-0582 DOI 10.1108/01140581111185535

PAR 23,3

346

and nancing cash ow areas were mixed or weak. Further, the information Cotter generated had to be derived from a careful analysis of the rms nancial statements. It was not necessarily easily obtained, understood, or widely disseminated in the pre-reform period. Studies such as Grifn et al. (2000) show that the simple requirement for rms to publicly disclose material information in a timely manner reduces the cost of obtaining that information and is correlated with a more rapid price response to that information. In 1991, the Australian Accounting Standards Board (AASB) issued AASB 1026 that required reporting entities to provide an annual statement of cash ows. Earlier, in 1987 and then again in 1992, the New Zealand Institute of Chartered Accountants (NZICA formerly known as NZSA or the New Zealand Society of Accountants) went down the same path[1]. By 2004 both accounting bodies required the classication of cash ows into operating, investing or nancing activities. The AASB stated at the time:
Cash ow information is useful in assessing the ability of the entity to generate cash and cash equivalents and enables users to develop models to assess and compare the present value of the future cash ows of different entities ( Jones et al., 1995)[2].

This study examines the statement, with a particular emphasis on the value relevance of cash ow information included in a scal year-end nancial statement. If the accounting reforms achieved their stated purpose, there should be a signicant incremental relationship between unexpected cash ow information and stock price movements in the market. While the intention of the cash ow accounting requirements was to encourage more disclosure of value-relevant information to investors, notable scholars like Benston (1973) and Stigler (1964) claim it is difcult to conclude exactly how mandatory disclosure rules have benetted securities markets. Other critics argue that the information required in accounting standards, such as in the cash ow statement, are of little value to investors (Burton et al., 1999)[3]. Ultimately, these types of challenges can be addressed by empirically testing the value impacts of the required information. It is noted that only with the passage of time are such studies feasible. In this paper we show that the cash ow information, as provided for in the reforms, can indeed be used to discern useful and value-relevant information for investors. The cash ow activities of interest lie in the areas of operating (CFO), investing (CFI) and nancing (CFF)[4]. We develop unique indicator series that identify when cash ow activities are unexpectedly high in a rm in a given nancial year. With these indicator series we measure the wealth effects over the reporting year associated with these unexpected levels of activity in each of the categories. As expected from prior studies, unexpectedly high levels of CFO in a reporting year are associated with signicant incremental positive cumulative abnormal returns (CARs) over the reporting year of about 10.3 percent per annum after adjustments for other conditioning factors are considered. This is consistent with studies already conducted in Australia, North America, and Europe (Arthur et al., 2010; Austin and Graydon, 1992; Bowen et al., 1987; Clinch et al., 2002; Cotter, 1996; Garrod and Hadi, 1998; Livnat and Zarowin, 1990; Wilson, 1986, 1987). However, our measurement is useful in the sense that it reveals the average incremental return associated with an up-side CFO surprise. The impact of investing and nancing cash ows has had very limited research coverage in the region. Here we report that unexpectedly high levels of cash ow

activity in investing (CFI) and nancing (CFF) are associated with signicant negative incremental CARs of about 7.8 and 6.5 percent per annum, respectively, in the years they occur. Perhaps unusually, the CFF effects are positive in New Zealand but negative in Australia. Mixed results like this in the nancing cash ow area are reective of the prior literature, for instance, see Garrod and Hadi (1998) and Livnat and Zarowin (1990) for examples of opposing outcomes for CFF in the USA and the UK. Prior studies generally report the same negative wealth effects associated with CFI disclosures as we report. To dig deeper into the effects of surprise cash ow disclosures we draw on the work of Kerstein and Kim (1995) who show that the market response to nancial disclosures is conditioned by the rms relative quality. As q is a measure of the relative value of a rms market value compared to its book value, we include a hypothesis that q values and interaction variables between q and unexpected cash ow indicators will condition the analysis of cash ow effects (Allayannis and Weston, 2001)[5]. The results reveal that rms with high q values (above the sample median) in a reporting year enjoy incremental abnormal returns (ARs) of about 23.5 percent over their low q counterparts[6]. The analysis also shows the interaction terms between high q and high levels of CFO, CFI, and CFF to have incremental values of 6.9, 2 4.2, and 2 7.7 percent, respectively, with just the CFO coefcient registering signicance. These outcomes, therefore, lend some support for the hypothesis that cash ow signalling effects are stronger in high q rms, however, the inuence of rm quality is not as clear in this study as it has been shown to be in US studies. A further question we raise is whether the market would have reacted in this way without the regulated cash ow disclosures. Unfortunately, our analysis can only go back as far as 1996 because of the lack of data availability on the Investment Research Group (IRG) and Datastream databases. So to address that question, in part, we rely on the work of Cotter (1996) who conducted research on the value impacts of CFO, CFI, and CFF data disclosures over the period 1975-1985 in Australian rms (ASX). Given this period was before the mandatory cash ow reporting requirements came into effect in Australia in 1991, Cotters study provides a useful reference point for what the response coefcients for CFO, CFF, and CFI were like in pre-reform Australia. Cotter reports positive and signicant wealth responses to CFO like we do, but rather weak responses for CFI and CFF cash ows. Over the ten-year period covered in her study the CFI and CFF coefcients change their direction repeatedly from year to year. The wealth impacts associated with CFI and CFF disclosures, on the other hand, now appear more consistent since the reforms and generally support a conclusion that investing and nancing cash ow actions tend to have negative effects. Thus, our results support the view that the accounting reforms in Australasia, in the form of mandatory cash ow reporting requirements, were both necessary and worthwhile. They were necessary to facilitate the continued development and integration of securities markets in the region, and they were worthwhile in that the cash ow information required clearly makes it easier for investors to gain value-relevant insights into rms prospects. Before moving to a discussion of the hypotheses, empirical model specication and data we briey provide coverage of the background literature for the study in the next section. Section 3 describes hypotheses, data, and methodology. In Section 4 we provide a discussion and analysis of the results and in Section 5 we conclude.

Australasian cash ow reporting 347

PAR 23,3

348

2. Related literature The question as to what rm-level information should be required in a well-setup mandatory disclosure regime is an important one. Black (2001), among others, shows that the quality of a countrys securities market disclosure environment is linked to economic growth outcomes. He argues that weak securities regimes are characterised by rms being forced to rely on internal nancing and/or bank nancing to fund their investment programmes. Alternately, strong securities regimes make a priority of the containment of information asymmetry between informed and uninformed investors. Kim (1993) and Pirrong (2002) show how investors at an information disadvantage lose money on average when they trade with those who have an information advantage. Pirrong argues that mandatory disclosure works by forcing rms to reveal information and thereby reducing the potential losses of uninformed traders. There is an extensive literature that supports the value relevance of operating cash ows. The research on investment and nancing cash ow disclosures is in comparison smaller and the results are ambiguous. Livnat and Zarowin (1990) examine the information content of the end-of-year operating, investing, and nancing cash ows information in US-based rms as required under FAS95. They show that aggregate operating cash ow has a positive relation with 12-month CARs, and investing cash ows have negative association with CAR. Aggregate nancing cash ows have a positive (but less signicant) association with CARs. Garrod and Hadi (1998) conducted a similar study on rms listed on the London Stock Exchange and their results indicate a positive relation between operating cash ows and AR, but a negative relation exists between investing cash ows and AR, and nancing ows had no association with ARs. The mixed results about investing cash ows are partly resolved in Kerstein and Kim (1995) who show that the valuation effect following capital investment expenditure is heavily related to individual company factors, and as such, failure to allow for these factors would lead to weak capital investment expenditure response coefcients with measurements of ARs. They posit that rms with only average investment opportunity sets available to them should have muted responses to the supply of investment information. Firms with poor investment opportunity sets, or rms facing signicant agency costs, might conceivably nd there are detrimental reactions to their investment disclosures. For an account of these possibilities, see the size maximization hypothesis (Malatesta, 1983) and overinvestment hypothesis ( Jensen, 1986). Jones (2001) addresses this issue in an empirical examination of the value impacts of investing cash ows activities in the context of information on the rms investment opportunity set, or Tobins q. Jones nds that the value impact of investing cash ow information is positive for high q rms, and negative for low q rms. Jones study is based on US rms. In other research on the impacts of nancing ows, Eckbo (1986) and Spiess and Afeck-Graves (1999) show that rms that raise external nance in the form of debt or convertible debt issues generally have negative CAR reactions to these announcements. Empirical studies on the value relevance of cash ow information in Australasia are rare; they are focused primarily on operating cash ows and are limited to Australia. While these studies generally advocate the positive information role of operating cash ows, they cover earlier years of data and report varied degrees of relevance. Studying the value impact of operating cash ows of rms available in the AGSM database during the 1975-1985 period (the period before cash ow disclosure regulation),

as mentioned above, Cotter (1996) reports a signicant explanatory power for operating cash ows on stock returns. The value relevance of operating cash ows in the Australian market is also conrmed by Clinch et al. (2002). Between 1992 and 1997 directly disclosed operating cash ows help explain stock annual returns beyond aggregate operating cash ows. However, this relation is true only for cases when operating cash ows can be used to predict the next years gure. The other study related to our paper is that of Arthur et al. (2010). These authors conrm that operating cash ows provide incremental information content in the years after disclosure regulation in Australia. However, their focus is on the prediction of future earnings, but not the stock returns. The only study that directly examines the value relevance of investing and nancing cash ows in Australia is Cotter (1996). During the period before the disclosure regulation, 1975-1985, she reports that these cash ows are nearly irrelevant in terms of relationships with stock returns. 3. Hypotheses, model specication, and data 3.1 Hypothesis development In line with the accounting bodies regulatory rationale, we are interested in examining the value relevance of Australasian rms operating, investment and nancing cash ow information. The Australasian accounting bodies, like their peers in the USA, Canada and the UK sought to encourage fuller, more meaningful, disclosures of value-relevant information to investors. As a point of difference, the Australasian regulators, however, opted for their own unique disclosure requirements in the form of AASB 1026 (Australian Accounting Standards Board, 1991) in Australia, and FRS 10 (Institute of Chartered Accountants of New Zealand, 1992) in New Zealand. It is acknowledged that Australasian rms tend to be smaller, and more commodity and industrially based than in other regions. Whether these markets respond to the cash ow information reported by companies after the reform, and in what direction, is thus an interesting empirical question. We also note here that it is essential to distinguish the effect of unexpected movements in a cash ow variable from that of mere level measures. Studies such as Livnat and Zarowin (1990) illustrate the importance of such acknowledgement. Our process is described in the next section but basically identies an expected level for each of the cash ow categories and then identies rms that exceed this expectation: H1. Unexpectedly high levels of activity in operating, investing and/or nancing cash ow accounts are associated with incremental abnormal returns. Another important aspect of hypotheses development in our study is the impact of rms quality on the market response to cash ow disclosures. Following Kerstein and Kim (1995), it is hypothesised that the relative quality of the rm can inuence the way the market reacts to news announcements. Categorising a sample of rms into high q and low q subsamples is commonly used to differentiate between rms that are thought to be value maximising (i.e. well-managed rms with growth opportunities) compared with value reducing (i.e. poorly managed rms or mature rms), high q and low q, respectively. On this basis we expect high q rms to be especially favourably treated upon the release of positive news about operating cash ows. For example, if high q captures growth options, then a high CFO may indicate that the company is delivering

Australasian cash ow reporting 349

PAR 23,3

350

on (beating) its promises and that gets reected in abnormal returns[7]. This means we expect the interaction term between high q and high CFO to be positive. Regarding investing cash ows, the free-cash ow hypothesis suggests high activities by low q rms should send a negative signal to investors. The opposite should hold for high q rms. Nevertheless, the empirical relationship is less than deterministic, and many previous studies have documented a negative impact of investing cash ows on stock returns. Cotter (1996) also notes that information impounded in investing cash ows may be dominated by the information revealed in accruals. Regarding nancing actions, Myers (1984) pecking order theory suggests these activities send a negative signal to uninformed investors, so when a high q rm engages in raising external nance then this signals that the rm is not generating enough operating cash ow to support its growth plans. Thus, the negative effects could be accentuated in high q rms and we expect a negative sign on high q and high CFF cases: H2. The association between abnormal returns and unexpectedly high levels of activity in operating, investing, and/or nancing cash ow accounts are conditioned by the q ratio of the rm. 3.2 Empirical model specication The challenge in this research is to evaluate whether the adoption of these particular mandatory disclosure rules have been of benet to these securities markets. This essentially involves showing, in this case, that these cash ow disclosures have abnormal stock market return (CAR) impacts[8]. However, this task is complicated by several factors including being able to isolate the incremental impacts of the cash ow disclosures when other important nancial information is being released at the same time, particularly earnings information. Another important consideration is the denition of the event window during which the information is expected to have its return impact. There is some difculty in identifying when the cash ow information is rst revealed. For while cash ow information is clearly revealed in the end-of-year accounts, indications of the nal amounts may also have been revealed in earlier preliminary announcements. For this reason, cash ow relevance researchers prescribe wide event windows of 12 months, or longer, to examine their hypotheses concerning cash ow disclosures. Accordingly, we use a 12-month-period time span to study the impact of cash ow information revealed in the nancial statements[9]. Specically, we dene a market-adjusted model (MAM) CAR for each rm year, based on monthly returns data, over the 12-month window BD(2 8, 3), where BD is the balance date for the rm, and BD(0) is referenced to the year-end for the rms accounts[10]. The equation is laid out below: CARi;t2T Ri;t2T 2 Rm;t2T 1

where Ri,t2 T is the return on the ith stocks total return index over the 12-month reporting window, BD(2 8, 3) (Boehme and Sorescu, 2002; Mitchell and Stafford, 2000)[11]. Rm,t2 T is the return on the Global Financial Data stock market total returns index for the country over the same period. For instance, for a rm with a 30 June balance date, the months from October the previous year through to September of the current year represent the reporting year or evaluation window. Measuring a CAR

response over such a wide-reporting window introduces the possibility that other disclosed information will be partially responsible for the measured impacts upon returns. For this reason, in our efforts to identify the incremental impacts of the cash ow information, we also draw on the work of Ball and Brown (1968) and Biddle et al. (1996), and account for the inuence of changing protability on AR outcomes. We also control size (Banz, 1981), leverage (Blazenko, 1996), and industry type. To measure the relative size of cash ow activity in a rm we follow and extend traditional studies in the area. We use the following procedure to determine if a rms cash ow activity is abnormally high in a given year. First, the rms cash ow ratio for the item (operating, investing, or nancing cash ows scaled by total assets) is calculated and from this the median cash ow ratio for all rms during the same year is deducted. This measure identies high-activity rms in the particular account, but it may be that the rm is always a high-activity rm in this area, therefore, we calculate the same measure for the rm in the prior year and deduct this ratio from this years ratio. Those rms that rank above the median on this net basis will classify with the indicator value of 1, indicating unexpected high activity[12]. This indicator variable aims to capture the real surprise nature of the cash ow information while taking into account both rm-specic and market-wide dimensions[13]. A useful example is the case where a rm has two very good consecutive years in the CFO account, but in absolute terms the second year is no better than the rst. In the second year the rm will be classied in the unexpectedly low category, even though it is doing well in absolute terms. The specic denitions for operating, investing and nancing cash ows are presented in Appendix 2, and in particular, see the denitions for ABNORCFOTA, ABNORCFITA, ABNORCFFTA and HighCFOTA, HighCFITA, HighCFFTA. The next step in the testing design takes the rm-wise reporting season CARs generated from equation (1) and examines these for links to movements in unexpected cash ows. We conduct both univariate and multivariate testing of the hypothesis that unexpected cash ows matter. To examine the point, we employ the following univariate ordinary least squares regression equation: CARt a0 a1 unexpected cash flow variable indicatort et 2

Australasian cash ow reporting 351

where CAR is calculated with the MAM over the month-wise window balance date BD(28, 3)[14]; unexpected cash ow variable indicator is one of the measures for unexpected high operating, investing, or nancing cash ows, highCFOTA, highCFITA or highCFFTA, respectively. In the multivariate form we use Petersens (2009) two-dimensional clustering (over rm and year) adjusted ordinary least squares regression format which takes the form: CARt a0 a1 highqt a2 highq * unexpected cash flow variable indicator t a3 unexpected cash flow variable indicator t a4 sizet a5 profitabilityt a6 leveraget a7 SIC t et

where CAR is calculated with the MAM over the month-wise window balance date BD(28, 3), and highq is a dummy for observations where a rms q ratio is above the sample median. Q is dened as the ratio of the market value of equity plus book value of debt scaled by the book value of total assets; the interaction term measures

PAR 23,3

352

the impact of unexpected cash ows in the presence of high q settings; unexpected cash ow variable indicator is dened above in equation (1); size is the natural log of total assets; protability is an indicator variable that has a value of 1 if a rms reported prot in a given year minus its reported prot in the previous year, scaled by total assets, is above the sample median[15]. Leverage is total long-term debt plus current liabilities scaled by total assets; SIC is a dummy set to 1 if the rm is in the resources, utilities, oil and gas, or nance sectors. In our regression testing, we primarily use Petersens (2009) two-dimensional clustering-adjusted OLS tests which control for xed rm and year effects. Petersens (2009) method estimates standard errors in panel data that account for correlations among different rms in the same year and different years in the same rm. The regression thus calculates standard errors which account for two dimensions of within cluster correlation. Several other testing specications, notably the Newey-West method and the Fama-McBeth method, are also employed to check the consistency of the results. In the multivariate testing, we model each of the three cash ow types (operating, investing, and nancing) in separate estimations to avoid assessing variables that are correlated with each other. 3.3 Data The database consists of nancial details for rms listed on the Australian and New Zealand stock exchanges, ASX and NZX, over the ten-year interval 1996 through 2005. This information is retrieved from Datastream and IRG Datex. The data collected contains details such as the rms operating cash ows, investing cash ows, nancing cash ows, and balance sheet and income statement items such as total assets, debt, reported earnings, and accruals. Monthly stock price indices and market indices adjusted for issues and dividends (gross indices) were accessed from IRG, Datastream and Global Financial Data. The initial sample collected consisted of 6,844 rm-year observations. To reduce the impact of irregular data colouring the results, we winsorise the continuous variables in the study (CAR, size, and leverage) at the 1 percent level. We also lter the data to remove observations with missing data (54 cases), exceedingly low share turnover (272 cases), and the rst year of observation for each rm (1,150 cases). The latter lter was necessary as at least two years of data are needed to calculate movements in the cash ow items. The nal dataset consists of a panel consisting of 5,368 rm-year observations over ten years, from 1996 to 2005, made up from 1,123 companies, of which 140 are from New Zealand and 983 are from Australia. The maximum sample size in any one year is 938 in 2005, and the minimum is 204 in 1996. The ten-year span of coverage compares well with other studies of a similar nature (e.g. Farshadfar et al., 2008, 13 years; Jones, 2001, eight years; Riddiough and Wu, 2009, 14 years). 4. Results 4.1 Descriptive results The rst analysis we conduct is concerned with establishing points of difference between Australasian and US-based rms, where the literature has been predominantly based. We measure, but do not report, the value-weighted descriptive statistics for the Australasian sample[16]. These statistics reveal that the rms in this region have relatively high rates of investment cash ows, operational cash ows, and lower rates

of nancing cash ows compared to the reported results in US studies, such as Riddiough and Wu (2009). Australasian rms operating, investing, and nancing cash ow activities were made at average rates of 15.6, 13.9, and 2 1.8 percent of total assets per annum, respectively, and this compares with rates of 10.9, 7.9 and 2.7 percent in similarly measured US rms over the period 1990-2003 as reported in Riddiough and Wu. Australasian rms also have higher dividend payout ratios, at 3.3 percent of total assets compared to 1.7 percent in US rms. Figure 1 shows the investment, operating, and nancing cash ows patterns over time within the region. The graph illustrates that the rate of investment activity is relatively constant compared to the rate of operational cash ows. It is also notable that the use of net-nancing inows is quite rare, with only two years where a net inow of nancing occurred. The gure also illustrates that nancing tends to be used to fund investment when operational cash ows are lower. Summary statistics of key variables in our regression analyses are provided in Tables I-IV. Table I provides mean statistics for the cash ow, q, and MAM ARs data on a yearly and country basis. Tables II-IV provides summary statistics for the inputs into the measures of abnormal stock returns in aggregate as well as for each country. In Table II, of note is that the MAM measure of CAR generates a standard deviation statistic that is lower than the one produced from the market model approach; hence, we prefer the MAM specication of CAR. Also of note is the low average for the beta estimates, and the wide range in these estimates. In Table III we see that there is quite a big gap between the mean and median estimates in Australia for CFOTA, CFITA, and CFFTA, but this is not the case in New Zealand. This may partly explain the different response coefcients that emerge for the two countries in the CFI and CFF areas. In Table IV a similar gap between estimates of mean and median occur. 4.2 The value relevance of cash ow information Our H1 is that investors respond to unexpected cash ow information. Tables V-VII present the results of univariate and multivariate analysis of the incremental value impacts of operating (CFO), investing (CFI), and nancing (CFF) cash ow information. These impacts are measured in terms of CARs effects over the reporting year using the MAM method. As mentioned above, an unexpected level of cash ow activity is one where the activity is high in relation to what happened in the rm in the prior year, as well as to what has been happening in the general market that year. The univariate results in Table V show that rms that generate higher than expected operating cash ows in a particular reporting year (highCFOTA 1) have CARs that are on average

Australasian cash ow reporting 353

Figure 1. Value-weighted operating, investment and nancing cash ows

PAR 23,3

Year

Freq.

CFOTA

CFITA Zealand 2 0.154 2 0.112 2 0.157 2 0.154 0.006 2 0.143 2 0.327 2 0.183 2 0.167 2 0.238 2 0.196 2 0.136 2 0.198 2 0.209 2 0.118 2 0.166 2 0.361 2 0.195 2 0.177 2 0.258 2 0.077 2 0.059 2 0.065 2 0.019 0.448 2 0.025 2 0.034 2 0.071 2 0.075 2 0.072

CFFTA 0.006 0.010 0.086 0.044 0.017 0.364 0.500 0.367 0.287 0.418 0.021 0.030 0.128 0.080 0.154 0.441 0.547 0.407 0.316 0.462 20.023 20.034 20.011 20.043 20.468 20.034 0.096 0.014 0.021 0.051

q 1.681 1.577 1.394 1.721 1.902 1.858 2.020 3.452 2.413 2.904 1.843 1.651 1.466 1.845 1.989 1.939 2.038 3.630 2.452 2.878 1.377 1.416 1.231 1.417 1.591 1.437 1.861 1.875 2.059 3.121

Reporting year MAM CAR 0.001 0.145 20.002 0.221 0.204 20.067 20.032 20.059 20.166 20.080 0.088 0.052 0.053 0.205 0.162 20.034 0.054 0.043 20.115 20.118 20.046 0.049 0.096 0.206 0.292 0.093 20.261 20.279 20.064 20.126

354

Aggregated Australia and New 1996 204 0.097 1997 240 0.074 1998 257 0.086 1999 280 0.115 2000 351 0.016 2001 489 2 0.114 2002 817 2 0.395 2003 887 2 0.391 2004 905 2 0.330 2005 938 2 0.193 Australia 1996 133 0.101 1997 164 0.059 1998 178 0.088 1999 199 0.125 2000 274 0.010 2001 410 2 0.147 2002 732 2 0.431 2003 797 2 0.439 2004 815 2 0.371 2005 837 2 0.216 New Zealand 1996 71 0.089 1997 76 0.106 1998 79 0.081 1999 81 0.089 2000 77 0.041 2001 79 0.061 2002 85 2 0.091 2003 90 0.035 2004 90 0.046 2005 101 2 0.008

Table I. Summary mean statistics by year

Notes: CFOTA is cash ow from operations scaled by total assets; CFITA is investing cash ow scaled by total assets; CFFTA is cash ow from nancing scaled by total assets; Q is market value of equity plus book value of debt scaled by total assets; reporting year MAM CAR is the MAM estimate of CAR over the reporting year, dened as: (total returns index value for the stock at BD( 3)/total returns index value for the stock at BD(28,) 2 1) 2 (total returns market index value at BD( 3)/total returns market index value at BD(2 8) 2 1)); the reported statistics are equal weighted means

11.3 percent better than rms with unexpectedly low operating cash ow activity ( p , 0.01). That is, rms in the high operating cash ow category in a given year earn an average of 2.4 percent AR (2 8.9 percent intercept value plus 11.3 percent), while low operating cash ow rms earn 2 8.9 percent. These results are consistent with US and Australian ndings such as those in Cotter (1996) and Livnat and Zarowin (1990). Firms that invest more actively in a particular reporting year (HighCFITA 1) exhibit an annual CAR of 9.0 percent less than rms that engage in lower levels of investing activity than expected ( p , 0.01). In other words, unexpectedly active investing years are associated with an average annual CAR of 2 7.7 percent (1.3 percent

Variable

Mean

Median

Min. 20.834 21.906 21.127 29.899 20.233 20.333 20.834 21.906 21.127 29.899 20.233 20.289 20.834 21.906 21.127 25.079 20.210 20.333

1st Pctl 99th Pctl 2 0.834 2 1.906 2 1.127 2 2.510 2 0.117 2 0.333 2 0.834 2 1.906 2 1.127 2 2.560 2 0.117 2 0.162 2 0.750 2 1.625 2 1.016 2 1.946 2 0.113 2 0.333 3.631 3.382 3.166 4.648 0.191 0.567 3.631 3.382 3.166 4.769 0.199 0.529 2.333 2.307 1.982 3.410 0.144 0.567

Max. 3.631 3.382 3.166 26.505 0.883 0.567 3.631 3.382 3.166 26.505 0.883 0.567 3.631 3.382 3.166 6.162 0.290 0.567

SD 0.719 0.787 0.700 1.340 0.058 0.204 0.748 0.821 0.728 1.403 0.060 0.192 0.526 0.570 0.525 0.894 0.043 0.254

n 5,368 5,368 5,368 5,368 5,368 5,368 4,539 4,539 4,539 4,539 4,539 4,539 829 829 829 829 829 829

Aggregated Australia and New Zealand Reporting year stock return 0.200 0.063 Reporting year MM CAR 0.038 20.034 Reporting year MAM CAR 20.032 20.152 Estimated beta 0.634 0.499 Estimated intercept 0.004 0.002 Reporting year market return 0.230 0.258 Australia Reporting year stock return 0.209 0.059 Reporting year MM CAR 0.032 20.049 Reporting year MAM CAR 20.032 20.166 Estimated beta 0.672 0.530 Estimated intercept 0.004 0.002 Reporting year market return 0.240 0.288 New Zealand Reporting year stock return 0.146 0.083 Reporting year MM CAR 0.068 0.015 Reporting year MAM CAR 20.030 20.092 Estimated beta 0.421 0.384 Estimated intercept 0.003 0.004 Reporting year market return 0.175 0.203

Australasian cash ow reporting 355

Notes: Reporting year stock return is the winsorised raw return over the reporting year; reporting year MM CAR is the market model estimate of CAR over the reporting year, dened as (total returns index value for the stock at BD( 3)/total returns index value for the stock at BD(2 8) 2 1) 2 (annualised reporting year alpha beta*reporting year return on the market index); estimated beta and intercept come from the regression of monthly stock returns on monthly market returns; the intercept estimate is on a per month basis; reporting year MAM CAR is the MAM estimate of CAR over the reporting year, dened as: (total returns index value for the stock at BD( 3)/ total returns index value for the stock at BD(2 8) 2 1) 2 (total returns market index value at BD( 3)/total returns market index value at BD(28) 2 1)); all returns based data are winsorised at the 1 percent level

Table II. Descriptive statistics of stock returns measures

intercept value minus 9.0 percent). This result is statistically signicant and consistent with US ndings such as those in Livnat and Zarowin (1990) where the incremental annual CAR coefcient relating to investing cash ows was also negative. In Australia, Cotter (1996) reported mixed outcomes in this category during the 1975-1985 period. For nancing activity, unexpected increases in the raising of nance in a particular year (highCFFTA 1) are associated with CARs that are 7.0 percent lower ( p , 0.01) than relatively inactive rms in this regard. That is, inactive rms earn 0.2 percent CAR while the active rms earn CARs of 26.8 percent. This contrasts to Livnat and Zarowin who report positive incremental CAR effects in this cash ow area. In the pre-reform period in Australia, Cotter (1996) reported insignicant CAR impacts in relation to nancing activity. The results in Table V also highlight the importance of q and relative prot growth in differentiating cross-sectional variation in CAR. Both of these identiers have strong positive relationships with contemporaneous CAR, with incremental effects of 22.5 and 25.2 percent, respectively, and with strong R 2 statistics. Table V also breaks down

PAR 23,3

Variable

Mean

Median

Min.

1st Pctl 2 4.56 2 1.98 2 0.87 2 3.22 2 2.32 2 5.07 0.34 0.01 2 4.74 2 2.24 2 0.90 2 3.36 2 2.63 2 5.56 0.32 0.01 2 0.91 2 0.47 2 0.60 2 0.79 2 0.81 2 1.04 0.41 0.01

99th Pctl 0.80 1.01 4.87 2.83 2.70 4.41 13.81 1.64 0.85 1.10 5.07 3.10 3.05 4.59 14.26 1.75 0.43 0.58 0.88 0.71 0.80 1.07 10.06 1.00

Max. 7.99 39.50 63.20 164.65 70.60 61.49 1,162.12 674.12 7.99 17.78 63.20 164.65 70.60 61.49 1,162.12 674.12 2.52 39.50 6.70 5.62 39.91 34.02 105.25 37.75

SD 2.59 1.61 1.89 3.47 2.07 2.52 17.05 9.23 2.81 1.64 1.98 3.77 2.09 2.63 18.46 10.02 0.44 1.39 1.23 0.43 2.01 1.75 4.00 1.32

n 5,368 5,368 5,368 5,368 5,368 5,368 5,368 5,368 4,539 4,539 4,539 4,539 4,539 4,539 4,539 4,539 829 829 829 829 829 829 829 829

356

Aggregated Australia and CFOTA 2 0.21 CFITA 2 0.19 CFFTA 0.30 ABNORCFOTA 2 0.01 ABNORCFITA 2 0.01 ABNORCFFTA 2 0.03 Q 2.38 Leverage 0.53 Australia CFOTA 2 0.25 CFITA 2 0.22 CFFTA 0.36 ABNORCFOTA 0.00 ABNORCFITA 2 0.01 ABNORCFFTA 2 0.04 Q 2.48 Leverage 0.54 New Zealand CFOTA 0.04 CFITA 2 0.01 CFFTA 2 0.04 ABNORCFOTA 2 0.01 ABNORCFITA 2 0.01 ABNORCFFTA 2 0.01 Q 1.79 Leverage 0.49

New Zealand 0.05 2164.36 20.10 271.19 0.02 233.78 0.01 2164.40 0.00 270.93 0.00 258.43 1.33 0.07 0.37 0.00 0.02 20.11 0.04 0.01 0.00 0.00 1.35 0.35 0.08 20.05 20.02 0.01 0.01 20.02 1.21 0.45 2164.36 271.19 215.68 2164.40 270.93 258.43 0.07 0.00 27.96 20.73 233.78 26.09 239.56 234.19 0.28 0.00

Table III. Descriptive statistics for the variables underlying the regression variables

Notes: CFITA is investing cash ows scaled by total assets; CFOTA is operating cash ows scaled by total assets; CFFTA is nancing cash ows scaled by total assets; ABNORCFOTA is a measure of abnormal operating cash ow in the reporting year, dened as: (CFOTA 2 median) 2 (lag(CFOTA) 2 lag(median)) where the median is for the CFOTA variable for all rms in that year; ABNORCFITA and ABNORCFFTA are similar measures of abnormal activity in the operational cash ow and nancing cash ow areas; q is market value of equity plus book value of debt scaled by total assets; leverage is total long-term debt plus current liabilities scaled by total assets

the results between Australia and New Zealand and shows the results are consistent between the two countries for CFO, q and protability, but differ in regard to CFI and CFF. For CFI we see a negative effect in the Australian data, and a positive effect in the New Zealand data. Similarly, we see a negative nancing effect in Australia and a positive effect in New Zealand. In the multivariate examination of the relation between CAR and cash ow activity, we assess each cash ow category in the presence of measures for q, size, leverage, and xed rm and year effects. The results in Table VI are broken up into three panels, one for each cash ow category. Column (1) of the table employs equation (3), or the high q interaction term model, to assess each cash ow type. Column (2) drops the high q interaction term in order to examine the specic incremental impact of abnormal cash ow information. The regression specication used is Petersens (2009)

Variable 2.2 23.7 0.4 22.2 0.6 45.6 1.5 22,366 214,144 28,634 210,802 22,418 0 0 22,367 214,144 28,634 210,802 22,418 0 0 2151.0 22,616.0 21,171.5 21,571.6 21,425.3 0.0 0.0 2 35.5 2 785.0 2 746.2 2 838.0 2 249.0 0.9 0.0 1,351.0 299.7 230.8 79.4 643.0 8,241.7 3,085.0 2 52 21,718 21,261 21,423 2 110 0 0 1,856 201 914 61 547 8,436 2,269 15,416 2,705 5,871 2,385 7,507 54,389 15,676 1,758.0 2,103.0 1,122.0 367.0 916.0 9,614.0 4,434.0 750.39 570.01 414.86 549.96 248.73 2,832.71 684.26 185.2 204.2 140.9 147.2 129.8 1,523.2 544.5 0.84 23.55 0.84 21.98 0.08 36.72 0.68 8.9 24.5 21.5 22.9 5.1 108.4 11.0 2 49.2 21,566.6 21,131.6 21,345.8 2 122.7 0.5 0.0 1,703.0 205.9 795.4 65.1 566.4 8,246.0 2,530.8 15,415.9 2,705.1 5,871.2 2,385.0 7,506.9 54,388.7 15,676.0 694.1 530.7 385.5 509.3 234.4 2,672.6 664.8

Mean

Median

Min.

1st Pctl

99th Pctl

Max.

SD

n 5,368 5,368 5,368 5,368 5,368 5,368 5,368 4,539 4,539 4,539 4,539 4,539 4,539 4,539 829 829 829 829 829 829 829

Aggregated Australia and New Zealand Operating cash ow ($m) 101.0 Investment cash ow ($m) 2 85.5 Financing cash ow ($m) 2 13.1 Accruals ($m) 2 72.3 Reported Prot ($m) 28.7 Assets Total ($m) 611.6 Long-term debt ($m) 146.1 Australia Operating cash ow ($m) 109.42 Investment cash ow ($m) 2 95.21 Financing cash ow ($m) 2 11.41 Accruals ($m) 2 79.17 Reported prot ($m) 30.25 Assets total ($m) 608.44 Long-term debt ($m) 138.06 New Zealand Operating cash ow ($m) 55.1 Investment cash ow ($m) 2 32.1 Financing cash ow ($m) 2 22.0 Accruals ($m) 2 34.9 Reported prot ($m) 20.1 Assets total ($m) 628.8 Long-term debt ($m) 189.9

Note: All the variables in this table are line items from the Datastream, Sirca and IRG databases

Australasian cash ow reporting 357

Table IV. Descriptive statistics for nancial statement items

PAR 23,3

High CFOTA Australia and New Zealand Intercept 20.089 * * * Slope 0.113 * * * R2 0.007 Australia Intercept 20.088 * * * Slope 0.109 * * * R2 0.006 New Zealand Intercept 20.097 * * * Slope 0.133 * * * R2 0.016

High CFITA 0.013 20.090 * * * 0.004 0.026 * 20.114 * * * 0.006 20.051 * * 0.046 0.002

High CFFTA 0.002 2 0.070 * * * 0.003 0.012 2 0.089 * * * 0.004 2 0.044 * 0.033 0.001

High q 20.144 * * * 0.225 * * * 0.026 20.161 * * * 0.252 * * * 0.030 20.062 * * * 0.076 * * 0.005

Relative prot growth 20.157 * * * 0.252 * * * 0.032 20.156 * * * 0.248 * * * 0.029 20.161 * * * 0.267 * * * 0.065

358

Table V. Univariate analysis of operating, investing, and nancing cash ows

Notes: Results from ordinary least squares tests of the relation between rm-reporting year winsorised MAM CARs and rm-reporting year indicator variables for high levels of cash ow activity, Highq and relative prot growth; the reporting year is the period BD(28, 3) where BD is balance date; equation: CARt a0 a1(Independent variablet) 1t; CAR is calculated with the MAM over the monthly window balance date BD(2 8, 3); HighCFOTA is an indicator variable when CFOTA is unexpectedly high in the reporting year; HighCFITA is an indicator variable when CFITA is unexpectedly high in the reporting year; HighCFFTA is an indicator variable when CFFTA is unexpectedly high in the reporting year; Highq is an indicator variable of those rms with a q ratio greater than the sample median in the reporting year; protability is an indicator variable that has a value of 1 if a rms reported prot in a given year minus its reported prot in the previous year, scaled by total assets, is above the sample median; n 5,368 in the aggregated sample, 829 in New Zealand and 4,539 in Australia; CAR data are winsorised at the 1 percent level

two-dimensional clustering method, over time and rm, using MAM ARs and where continuous data are winsorised. The results in column (2) conrm the ndings described in the univariate analysis (Table V) above, that unexpectedly high cash ow activity in each of the three cash ow areas is associated with signicant incremental AR impacts. That is, highCFO has positive impacts, and highCFI and highCFF have negative impacts. Column (1) examines H2, that the relative quality of the rm can inuence the way the market reacts to these news announcements. The results reveal that high q is an important conditioner for CFO effects, but does not consistently relate signicantly to CFI or CFF. Specically, column (1) shows the interaction variable between q and operating cash ows (Highq*HighCFOTA), is positive 6.9 percent ( p , 0.10). This result represents support for the view that the market distinguishes rm activities on the basis of their quality (Kerstein and Kim, 1995). Also noteworthy is that the highCFFTA variable (column 2) becomes insignicant when the interaction term highq*highCFFTA is added. Thus, the negative nancing effect appears to be contained in the high q rms. Table VII shows the results in subsamples: Australian data, New Zealand data, and industrial rm data (excluding resource, utility, and nance rms). The results for Australia, column (3), are reective of those already reported. The results for New Zealand, column (4), are consistent with Australia for CFO, and control variables q and relative prot growth, but incongruent for CFI and CFF. In New Zealand there is a relatively strong (but statistically insignicant) highq*highCFITA effect, which indicates high q rms investment activities are considered in a more favourable light.

CARt a0 a1 highqt a2 highq * unexpected cash flow variable indicator t a3 unexpected cash flow variable indicator t a4 sizet a5 profitabilityt a6 leveraget a7 SIC t 1t (1) (2) Panel A: operating Constant Highq Highq*HighCFOTA HighCFOTA Size Leverage Relative prot growth SIC R2 Panel B: investing Constant Highq Highq*HighCFITA HighCFITA Size Leverage Relative prot growth SIC R2 Panel C: nancing Constant Highq Highq*HighCFFTA HighCFFTA Size Leverage Relative prot growth SIC R2 Observations 20.399 * * * 0.199 * * * 0.069 * 0.068 * * * 0.036 * * * 20.203 * * * 0.239 * * * 0.078 0.080 20.336 * * * 0.257 * * * 20.042 20.057 * * 0.037 * * * 20.209 * * * 0.238 * * * 0.080 0.077 20.355 * * * 0.273 * * * 20.077 20.026 0.037 * * * 20.207 * * * 0.239 * * * 0.082 0.076 5,368 2 0.418 * * * 0.235 * * * (dropped) 0.103 * * * 0.037 * * * 2 0.205 * * * 0.239 * * * 0.078 0.079 2 0.325 * * * 0.236 * * * (dropped) 2 0.078 * * * 0.037 * * * 2 0.210 * * * 0.238 * * * 0.080 0.077 2 0.335 * * * 0.236 * * * (dropped) 2 0.065 * * * 0.037 * * * 2 0.209 * * * 0.239 * * * 0.082 0.076 5,368

Australasian cash ow reporting 359

Notes: CAR is calculated with the MAM over the monthly window BD(2 8, 3) where BD is balance date; highq is a dummy for rm years when the q ratio is above the sample median; the interaction terms measure the impact of unexpected cash ows in the presence of high q; HighCFOTA, highCFITA and highCFFTA are indicators for high unexpected cash ows; size is the natural log of total assets; protability is an indicator variable that has a value of 1 if a rms reported prot in a given year minus its reported prot in the previous year, scaled by total assets, is above the sample median; leverage is total long-term debt plus current liabilities scaled by total assets; SIC is a dummy set to 1 if the rm is in the resources, utilities, oil and gas, or nance sectors; CAR, size, and leverage are winsorised at the 1 percent level; Petersens (2009) two-dimensional clustering method over time and rm is used in outputs (1) and (2); output (1) examines the full interaction-term model and output (2) examines the model with no interaction variable

Table VI. Multivariate analysis of operating, investing, and nancing cash ows

The country-specic results are discussed further in the conclusion below. The analysis of an industrial rms only sub sample in column (5) produces results that are also consistent with the overall sample[17], [18]. To summarise the ndings: unexpected CFO information has a signicant upside incremental relationship with CAR, and in high q rms this effect is accentuated.

PAR 23,3

CARt a0 a1 highqt a2 highq * unexpected cash flow variable indicator t a3 unexpected cash flow variable indicator t a4 sizet a5 profitabilityt a6 leveraget a7 SIC t 1t (3) (4) (5) Australia NZ Industrials only Panel A: operating Constant Highq Highq*HighCFOTA HighCFOTA Size Leverage Relative prot growth SIC R2 Panel B: investing Constant Highq Highq*HighCFITA HighCFITA Size Leverage Relative prot growth SIC R2 Panel C: nancing Constant Highq Highq*HighCFFTA HighCFFTA Size Leverage Relative prot growth SIC R2 Observations 2 0.430 * * * 0.221 * * * 0.080 * 0.064 * * * 0.038 * * * 2 0.201 * * * 0.237 * * * 0.092 * 0.082 2 0.358 * * * 0.292 * * * 2 0.056 2 0.075 * * * 0.039 * * * 2 0.206 * * * 0.233 * * * 0.093 * * 0.081 2 0.378 * * * 0.305 * * * 2 0.083 2 0.047 0.039 * * * 2 0.204 * * * 0.236 * * * 0.096 * 0.081 4,539 20.233 * * * 0.077 0.012 0.083 * * * 0.022 * 20.218 * * * 0.247 * * * 20.009 0.089 20.209 * * 0.046 0.070 0.035 0.021 * 20.228 * * * 0.266 * * * 20.014 0.087 20.246 * * * 0.096 * * 20.037 0.093 * * 0.024 * * 20.230 * * * 0.272 * * * 20.016 0.087 829 2 0.383 * * * 0.158 * * * 0.017 0.060 * * 0.036 * * * 2 0.184 * * * 0.269 * * * (dropped) 0.083 2 0.334 * * * 0.174 * * * 2 0.017 2 0.034 0.036 * * * 2 0.188 * * * 0.269 * * * (dropped) 0.081 2 0.336 * * * 0.182 * * * 2 0.034 2 0.035 0.036 * * * 2 0.185 * * * 0.269 * * * (dropped) 0.082 3,521

360

Table VII. Subsample analysis

Notes: CAR is calculated with the MAM over the monthly window BD(2 8, 3) where BD is balance date; highq is a dummy for rm years when the q ratio is above the sample median; the interaction terms measure the impact of unexpected cash ows in the presence of high q; HighCFOTA, highCFITA and highCFFTA are indicators for high unexpected cash ows; size is the natural log of total assets; protability is an indicator variable that has a value of 1 if a rms reported prot in a given year minus its reported prot in the previous year, scaled by total assets, is above the sample median; leverage is total long-term debt plus current liabilities scaled by total assets; SIC is a dummy set to 1 if the rm is in the resources, utilities, oil and gas, or nance sectors; CAR, size, and leverage are winsorised at the 1 percent level; Petersens (2009) two-dimensional clustering method over time and rm is used in outputs (3), (4), (5), and (6); Australian data are assessed in output (3), New Zealand data in output (4), and industrial rms only are evaluated in output (5)

Heightened investing activity is generally a negative value factor in both low q rms or high q rms. Heightened nancing actions are also generally a negative value factor, and most of this result is from the high q rms. Such nancing actions could signal the high q rms internally generated cash ows are not as healthy as investors

may have hoped. They also suggest the rms are struggling to deliver on their promise of higher growth. 5. Conclusion This study empirically examines whether cash ow disclosure regulation issued by Australasian accounting bodies, AASB and NZICA (formerly NZSA), between 1987 and 1992 had the impact the accounting bodies claimed it would, specically, Cash ow information is useful [. . .] it enables users to [. . .] assess and compare the present value of the future cash ows of different entities. In a study of the value relevance of Australasian rms investment, operating, and nancing cash ow information produced over the period 1996-2005 our results support the claim. We show that all three forms of cash ow information operations, investment, and/or nancing are signicantly related to stock returns and useful in assessing and comparing the relative merits of rms. We also show that the links between cash ow disclosures and wealth effects seem more clearly dened in the post-regulation era than they were before the passage of the regulation. Since this value-relevant information is now a formally required disclosure, and the information is not easily formulated by investors in the absence of the regulation, the accounting initiatives were well grounded and should reduce the cost for investors in obtaining the information. Overall, our ndings represent an endorsement for the regions accounting bodies ongoing securities market reform efforts. There are a number of other potential contributions from this study. In terms of the sample, the relatively small size and commodity-based nature of many of the rms may bring relevance to Chan et al.s (2005) point that there are difculties in generalising US results to other market settings. An Australasian sample can represent a market that is less well informed and more likely to benet from improved cash ow disclosures. The study also develops measures of unexpected cash ow activity, and it provides some of the rst analysis that indicates the signicant impacts of investing cash ows and nancing cash ows in the region. We can also provide specic commentary on each country. In Australia we can also compare Australian data before and after the regulatory initiative as we have Cotters (1996) study to use as a reference point, and in this regard there appears to be more consistency in the outcomes since the introduction of the regulation, particularly in the areas of nancing. We also see clear links between each of the cash ow areas and wealth effects, and rm q generally accentuates these effects in the CFO area. The nding that investment activity has been linked to negative wealth impacts could be linked to the commodity/utility-based nature (e.g. lower growth opportunities) of the sample. In New Zealand we do not have a reference study from the pre-reform period to compare our results. Nevertheless, there is evidence that cash ow information is incrementally useful. Of note is that high q rms seem to get incremental benets from operating (and perhaps investing) cash ow activity. This is consistent with Kerstein and Kims (1995) conjecture that the quality of rms will differentiate the response to nancial disclosures. There is also evidence that when rms raise nance it sends a positive wealth signal. We conclude with a nal remark that the adoption of International Financial Reporting Standards (IFRS), made mandatory in Australia in 2005, and in 2007 in New Zealand, provides a promising venue for future research. Some commentators

Australasian cash ow reporting 361

PAR 23,3

362

are casting doubt about the IFRS, for instance, Jones and Higgins (2006) note that corporations and practitioners in Australia are sceptical about the adoption of these standards as they are perceived by some to be inferior to the existing regions practices. In retrospect we note that the same type of challenges and comments were being made about the earlier reforms covered in our study. Whether or not the switch to IFRS is benecial is still an open question; here, the question is partially addressed by illustrating the information content of disclosures[19].
Notes 1. In New Zealand, in October 1987, NZSA issued SSAP 10 Statement of Cash Flows, and subsequently Financial Reporting Standard 10 (FRS 10) Statement of Cash Flows, in 1992, and then later NZIAS 7 Cash Flow Statements, in November 2004 (New Zealand Society of Accountants, 1987; Institute of Chartered Accountants of New Zealand, 2004). In Australia, in December 1991, the AASB issued AASB 1026 Statement of Cash Flows, followed by AASB 107 in 2004. 2. AASB 107 (Australian Accounting Standards Board, 2004, p. 11). Jones expresses the same view that the cash ow statement helps users assess the quality of earnings. 3. Critics claim the cash ow statement is pointless and the information could be dissected from the skilful interpretation of the existing nancial statement information anyway. Burton make this case when they discuss rational expectations theory in the context of reported cash ow information. 4. Operating cash ows are dened as those generated from the business activities of the rm (in years when the rm generates net inows of operating cash ows the sign will be positive). Investing cash ows are dened as those generated in the acquisition and disposal of long-term assets and other investments (in years when the rm is a net investor the sign of cash ows from investing will be negative, but the high investing dummys sign will be positive); and, nancing cash ows are those generated when the rm changes its level of contributed equity or borrowings (in years when the rm raises net external nance the sign of cash ows from nancing will be positive). 5. Allayannis and Weston show that several measures used to proxy for Tobins Q are highly correlated with each other. 6. This is partly tautological, of course, as rms whose stock prices outperform over the reporting year will tend to have high Qs. A correlation check of CAR and high Q shows a Spearmans r of 0.1263 with a p-value , 0.0000. 7. We thank one of the referees for this comment. 8. But even if there are no discernable value impacts, the information may still have value to investors for other reasons, such as for transparency motives, or solvency motives. 9. We note that since 2003 ASX must report to the stock exchange within two months of balance date; the window had been 75 days before 2003. In New Zealand the reporting deadline on the NZX is 60 days from balance date. This means all rms report their end-of-year nancial reports within a three-month period immediately following the balance date of the ith rm, denoted Balance Date (1, 3). We implement an analysis of using just the BD(1, 3) window to evaluate CAR as a robustness check and obtain the similar results as those reported in this study. 10. We also employ a market model specication for robustness (Table VI, column (5)). The estimation period for the market model coefcients are the interval BD (2 12, 2 9) and BD (4, 12). There is more variability in the outcomes with this procedure as estimated betas

tend to be erratic in thinly traded markets. See the summary statistics about beta and market model CAR in Table I for evidence of this. 11. A further point to make about the 12-month window allocated to the event period is that such windows are increasingly common in event study design, see Mitchell and Stafford and Boehme and Sorescu. 12. The indicator variable approach has several advantages; rst, its simplicity, second, its robustness to the presence of outliers (it overcomes the effect of freak ratios on the regression output, such as when the denominator in a ratio approaches zero), and third, it assists in the interpretation of CARs. The disadvantages are the arbitrariness of the threshold-level and the loss of absolute-level informations. 13. It would be ideal if we used only data that were observable. Nevertheless, the impact of a variety of balance dates should not alter the results altogether. We looked at the data and note that just 4 percent of observations have balance dates before June (early reporters). Thus, any early reported problem could be immaterial. In fact, 75 percent of the observations have a June balance date so the observed median should be a reasonable representation of the whole year number. 14. We also estimate CAR with the market model and report the results of this design in Table VI, column (5). 15. We also dene a measure of protability that uses the same format as the denitions for highCFOTA, highCFITA, and highCFFTA. The results are consistent but not reported. 16. We employ the value-weighted statistics which has the effect of normalising the statistics as large rms have more inuence. The approach facilitates a more intuitive understanding of Australasian cash ow data over time. During the 1996-2005 period, the ratio of operational cash ows to total assets ranges from 0.07 to 0.21 and seems to improve over time. The same ratio for investing cash ows uctuates over time and ranges from 0.11 (1998) to 0.20 (2002). The ratio of nancing cash ows to total assets is generally negative (six out of ten years, mostly 1999 onwards) and range from 20.05 to 0.03. 17. We also check to see that the results are robust to different regression specications, including the Newey-West method, the Fama-McBeth weighted method and with a Market Model measurement of ARs. The results are consistent for the most part. It shows the interaction variable between q and nancing cash ows (Highq*HighCFFTA) is negative ( p , 0.10). A point of difference is that the Market Model specication has lower R 2 values. For brevity, we do not report these results which are available upon request. 18. The resources, utilities, and nance subgroup results are not reported but are available on request. We also perform an analysis using unwinsorised data and the results are effectively the same in aggregate except that the R 2 values are lower. Winsorising the CAR data appears to be particularly important in New Zealand data in low q rms. 19. We thank one of the referees for pointing out this area. References Allayannis, G. and Weston, J. (2001), The use of foreign currency derivatives and rm market value, The Review of Financial Studies, Vol. 14, pp. 243-76. Arthur, N., Chen, M. and Czernkowski, R. (2010), Cash ow disaggregation and the prediction of future earnings, Accounting and Finance, Vol. 50 No. 1, pp. 1-30. Austin, L.M. and Graydon, D.G. (1992), Time series properties of company earnings and cash ows: some NZ empirical evidence, Accounting Research Journal, Vol. 5, pp. 15-24. Australian Accounting Standards Board (1991), AASB 1026 Cash Flow Statements.

Australasian cash ow reporting 363

PAR 23,3

364

Australian Accounting Standards Board (2004), AASB 107 Cash Flow Statements. Ball, R. and Brown, P. (1968), An empirical evaluation of accounting income numbers, Journal of Accounting Research, Vol. 6, pp. 159-77. Banz, R.W. (1981), The relationship between return and market value of common stocks, Journal of Financial Economics, Vol. 9, pp. 3-18. Benston, G.J. (1973), Required disclosure and the stock market: an evaluation of the Securities Exchange Act of 1934, American Economic Review, Vol. 63, pp. 132-55. Biddle, G.C., Seow, G. and Siegel, A.F. (1996), Relative versus incremental information content, Contemporary Accounting Research, Vol. 12 No. 1, pp. 1-23. Black, B.S. (2001), The legal and institutional preconditions for strong securities markets, UCLA Law Review, Vol. 48, pp. 781-855. Blazenko, G.W. (1996), Corporate leverage and the distribution of equity returns, Journal of Business & Accounting, October, pp. 1097-120. Boehme, R. and Sorescu, S. (2002), The long-run performance following dividend initiations and resumptions: underreaction or product of chance?, The Journal of Finance, Vol. 57, pp. 871-900. Bowen, R.M., Burgstahler, D. and Daley, L.A. (1987), The incremental information content of accrual versus cash ows, The Accounting Review, Vol. 62 No. 4, pp. 723-47. Burton, B.M., Lonie, A.A. and Power, D.M. (1999), The stock market reaction to investment announcements: the case of individual capital expenditure projects, Journal of Business Finance & Accounting, Vol. 26, pp. 681-708. Chan, H., Faff, R. and Ramsey, A. (2005), Firm size and the information content of annual earnings announcements: Australian evidence, Journal of Business Finance & Accounting, Vol. 32, pp. 211-53. Clinch, G., Sidhu, B. and Sin, S. (2002), The usefulness of direct and indirect cash ow disclosures, Review of Accounting Studies, Vol. 7 No. 4, pp. 383-404. Cotter, J. (1996), Accrual and cash ow accounting models: a comparison of the value relevance and timeliness of their components, Accounting and Finance, Vol. 36, pp. 127-50. Eckbo, B.E. (1986), Valuation effects of corporate debt offerings, Journal of Financial Economics, Vol. 15, pp. 119-51. Farshadfar, S., Ng, C. and Brimble, M. (2008), The relative ability of earnings and cash ow data in forecasting future cash ows: some Australian evidence, Pacic Accounting Review, Vol. 20, pp. 254-68. Garrod, N. and Hadi, M. (1998), Investor response to cash ow information, Journal of Business Finance & Accounting, Vol. 25, pp. 613-30. Grifn, P.A., Grundfest, J.A. and Perino, M.A. (2000), Stock Price Response to News of Securities Fraud Litigation: Market Efciency and the Slow Diffusion of Costly Information, Stanford Law School, Stanford, CA, SSRN Electronic Library. Institute of Chartered Accountants of New Zealand (1992), Financial Reporting Standard 10 (FRS 10) Statement of Cash Flows, ICANZ, Wellington. Institute of Chartered Accountants of New Zealand (2004), NZIAS 7 Cash Flow Statements, ICANZ, Wellington. Jensen, M.C. (1986), Agency costs of free cash ow, corporate nance, and takeovers, American Economic Review, Vol. 76, pp. 323-9. Jones, J.P. (2001), The implications of rms investment opportunities for the valuation of cash ows from investing activities, Advances in Accounting, Vol. 18, pp. 169-93.

Jones, S. and Higgins, A.D. (2006), Australias switch to international nancial reporting standards: a perspective from account preparers, Accounting and Finance, Vol. 46, pp. 629-52. Jones, S., Romano, C.A. and Smyrnios, K.X. (1995), An evaluation of the decision usefulness of cash ow statements by Australian reporting entities, Accounting & Business Research, Vol. 25, pp. 115-29. Kerstein, J. and Kim, S. (1995), The incremental information content of capital expenditures, Accounting Review, Vol. 70, pp. 513-26. Kim, O. (1993), Disagreements among shareholders over a rms disclosure policy, Journal of Finance, Vol. 48, pp. 747-60. Livnat, J. and Zarowin, P. (1990), The incremental information content of cash-ow components, Journal of Accounting and Economics, Vol. 13, pp. 25-46. Malatesta, P.H. (1983), The wealth effect of merger activity and the objective functions of merging rms, Journal of Financial Economics, Vol. 11, pp. 155-81. Mitchell, M. and Stafford, E. (2000), Managerial decisions and long-term stock-price performance, Journal of Business, Vol. 73, pp. 287-329. Myers, S.C. (1984), The capital structure puzzle, The Journal of Finance, Vol. 39, pp. 575-92. New Zealand Society of Accountants (1987), Statement of Standard Accounting Practice 10 (SSAP10), Statement of Cash Flows, NZSA, Wellington. Petersen, M.A. (2009), Estimating standard errors in nance panel data sets: comparing approaches, Review of Financial Studies, Vol. 22, pp. 435-80. Pirrong, C. (2002), A growing market, Regulation, Cato Institute, Washington, DC, pp. 30-7 (Summer). Riddiough, T. and Wu, Z. (2009), Financial constraints, external-source liquidity, and investment, Real Estate Economics, Vol. 37 No. 3, pp. 447-81. Spiess, D.K. and Afeck-Graves, J. (1999), The long-run performance of stock returns following debt offerings, Journal of Financial Economics, Vol. 54, pp. 45-73. Stigler, G. (1964), Public regulation of the securities markets, The Journal of Business, Vol. 2, pp. 117-42. Wilson, G.P. (1986), The relative information content of accruals and cash ow: combined evidence at the earnings announcement and annual report release date, Journal of Accounting Research, pp. 165-203 (supplement). Wilson, G.P. (1987), The incremental information content of the accrual and funds components of earnings after controlling for earnings, The Accounting Review, Vol. 62, pp. 293-322. Appendix 1

Australasian cash ow reporting 365

Aggregate sample size New Zealand Australia Firm-year sample taken from IRG, SIRCA, and Datastream Data are missing Removal of thin trading stocks Delete rst year of data for each rm Final rm-year sample Final rm sample 6,844 54 272 1,150 5,368 1,123 980 1 9 141 829 140 5,864 53 263 1,009 4,539 983

Table AI. Data lters

PAR 23,3

Appendix 2

366

BD Reporting year Reporting year Market Model CAR Reporting year MAM CAR CFITA (investment) CFOTA (operations) CFFTA (nancing) ABNORCFITA ABNORCFOTA ABNORCFFTA HighCFITA HighCFOTA HighCFFTA Protability Q Highq Leverage Highq*HighCFOTA Highq*HighCFITA Highq*HighCFFTA Size SIC

Table AII. Denitions

Balance date (month) of the rm The period BD(28, 3) (to account for reporting lag) (Total returns index value for the stock at BD(3)/total returns index value for the stock at BD(2 8) 2 1) 2 (annualised reporting year alpha beta*reporting year return on the market index) (Total returns index value for the stock at BD(3)/total returns index value for the stock at BD(2 8) 2 1) 2 (total returns market index value at BD(3)/total returns market index value at BD(28) 2 1)) Investing cash ows scaled by total assets Operating cash ows scaled by total assets Financing cash ows scaled by total assets (CFITA 2 medianCFITA) 2 (lag(CFITA) 2 lag(medianCFITA)) where the medianCFITA is the median observation for the variable for rms in that year (CFOTA 2 medianCFOTA) 2 (lag(CFOTA) 2 lag(medianCFOTA)) where the medianCFOTA is the median observation for the variable for rms in that year (CFFTA 2 medianCFFTA) 2 (lag(CFFTA) 2 lag(medianCFFTA)) where the medianCFFTA is the median observation for the variable for rms in that year An indicator variable with a value of 1 when ABNORCFITA ge median ABNORCFITA for the year An indicator variable with a value of 1 when ABNORCFOTA ge median ABNORCFOTA for the year An indicator variable with a value of 1 when ABNORCFFTA ge median ABNORCFFTA for the year An indicator variable with a value of 1 when a rms reported prot minus the prior years reported prot divided by assets is greater than the sample median Market value of equity plus book value of debt scaled by total assets Those rms with a q ratio greater than the sample median Year-end total long-term debt plus current liabilities scaled by total assets Highq*highCFOTA Highq*highCFITA Highq*highCFFTA Ln(Total Assets) Indicator variable scoring 1 if the industry classication is resources, utilities, oil and gas, or nance

Appendix 3. Correlation between the cash ow items Spearman correlation of CFOTA, CFITA, and CFFTA reporting r and p statistics, obs 5,368. CFITA is investing cash ows scaled by total assets. CFOTA is operating cash ows scaled by total assets. CFFTA is nancing cash ows scaled by total assets. HighCFITA is an indicator variable when CFI is unexpectedly high in the reporting year. HighCFOTA is an indicator variable when CFO is unexpectedly high in the reporting year. HighCFFTA is an indicator variable when CFF is unexpectedly high in the reporting year (Tables AIII-AIV).

CFOTA CFOTA CFITA CFFTA 1.000 2 0.086 0.000 2 0.591 0.000

CFITA 1.000 20.371 0.000

CFFTA

Australasian cash ow reporting 367

1.000 Table AIII.

HIGHCFOTA HIGHCFOTA HIGHCFITA HIGHCFFTA 1 2 0.049 0.000 2 0.210 0.000

HIGHCFITA 1 0.373 0.000

HIGHCFFTA

1 Table AIV.

About the authors Christopher B. Malone is a Senior Lecturer in the School of Economics and Finance, Massey University, New Zealand. He has a Bachelors degree and a Masters degree (Accounting and Finance) from Massey University and a PhD (Finance) from the University of Connecticut. He has taught a range of classes including Corporate Finance, Portfolio Management, Investments, Institutions and Markets, International Finance, Finance Risk Management, Introductory Economics and Introductory Accounting, as well as supervising post-graduate student research. His research interests lie in the eld of investments, international nance and corporate nance and he has papers published in the Pacic Basin Journal of Finance, Applied Economic Letters, Pacic Accounting Review, International Journal of Managerial Finance, and Journal of Emerging Markets Finance. Christopher B. Malone is the corresponding author and can be contacted at: c.b.malone@massey.ac.nz Udomsak Wongchoti has a Finance PhD from the University of Memphis (USA) and joined the School of Economics and Finance, Massey University in February 2003. His current research interests are in the eld of asset pricing models, market anomalies, applied corporate nance, and stock valuation. Some of his selected works have been presented at the European Finance Association, FMA Annual Meetings, and the New Zealand Finance Colloquium. He has published his works in quality journals including The Finance Review, Pacic Basin Finance Journal, Applied Economics Letters, and International Review of Financial Analysis. He also acts as an ad hoc referee for several journals such as Journal of Banking & Finance, Review of Quantitative Finance and Accounting, Pacic Basin Journal, and Quantitative Finance. Alan J.Mitchell is Chairman at NZALPA Trustee Company Ltd and a Pilot at Air New Zealand. He was previously a Flight Instructor at Massey University School of Aviation and an Auditor at Coopers & Lybrand. Alan has an MFin from Massey University.

To purchase reprints of this article please e-mail: reprints@emeraldinsight.com Or visit our web site for further details: www.emeraldinsight.com/reprints