The informational impacts of Australian listed companies reporting the direct or indirect method statement of cash flows: cash flow disclosure

Abstract

This thesis examines whether cash flow disclosure under International Accounting Standard (IAS) 7 has an influence on the degree of information asymmetry incurred by market participants. We evaluate the impact of cash flow disclosure for ASX (Australian Securities Exchange) listed companies and its association with value relevance, prediction of future cash flows, earnings and cost of capital. The following three essays in this thesis demonstrate that the type of cash flow disclosure reported by ASX listed companies can change the amount of information asymmetry experienced by investors. Essay 3 examines whether the choice of cash flow disclosure under IAS 7 has an influence on the cost of capital incurred by ASX listed companies. A matched pairs sample is created using replacement to assess whether cost of debt or equity is associated with cash flow disclosure.Companies reporting the indirect method on average pay a higher cost of debt by 100 basis points iii although this result is not significantly different from companies reporting the direct method.Company size and interest coverage are both significant at a 1 per cent level in explaining the cost of debt. Return on assets (ROA) and leverage are also significant at the 10 per cent level for cost of debt.Cost of equity is examined using the Capital Asset Pricing Model (CAPM) with no evidence to suggest that cash flow disclosure is associated with a company's cost of equity. Overall, Essay 3 demonstrates that the cost of capital incurred by ASX listed companies is not related to their choice of cash flow disclosure.iv