Investigation of the Ability of Restatement Items for Prediction of Operation Cash Flow with Respect to Choice of Accounting by Managers

Document Type : Research Paper

Authors

1 Professor of Accounting, Shahid Bahonar University of Kerman, Kerman, Iran.

2 Associate Professor of Accounting, Sahid Bahonar University, Kerman, Iran.

3 Ph.D Student of Accounting, Sahid Bahonar University, Kerman, Iran.

10.22103/jdc.2021.18325.1161

Abstract

Objective: investors and creditors require financial information to make sound investing decisions. One of the main criteria in evaluating company performance is prediction of its future cash flow which is an inseparable part of all financial units and the balance between cash flow and its money-related requirements is essential for the continuation of financial activities in a unit. Considering the fact that here is little direct evidence in prior literature on whether discretionary accrual choices enhance or detract from the predictive ability of accruals with respect to future cash flows, the present study aimed to examine whether management’s motivation for discretionary accrual choices affects the forecasting properties of accruals and cash flows with respect to future cash flows. Cash flow prediction is an important task for all internal and external organizational users. Investors use this information to determine the future value of a financial unit, its stock price in the market and decide to whether hold or sell their stock. In other words, possible changes in future cash flow can play a significant role in the financial decisions of investors.
 Methods: to test our hypothesis, we used multi-regression method. Study sample include restated companies in Tehran Stock market from 2003 until 2013. The sample was divided using an opportunistic meet-or-beat model (OP-MB). Our predictions for the opportunistic group (with 107 observations) and the non-OP-MB group (with 682 observations) were obtained using Barth et.al (2001) equation.
 Results: Using a sample of restatement firms and a meet-or-beat model to classify firms as making discretionary accounting choices for opportunistic meet-or-beat (OP-MB) reasons, we show that originally reported earnings and accrual components are less predictive for future cash flows relative to the restated numbers. We find the opposite is not true for firms classified as making discretionary accounting choices for non-OP-MB reasons. To distinguish between the informational and efficient contracting explanations of the results for the non-OP-MB sample we split the non-OP-MB sample into those cases where the discretionary accounting choices are income- decreasing versus income-increasing. We find no difference between forecasting properties of originally reported earnings and accrual components and their restated counterparts in the income-increasing non-OP-MB sample. In income-decreasing non-OP-MB sample, restated data have more predictive power than originally reported earnings and accrual components.
 Conclusion: our first hypothesis was not confirmed since there was no significant difference between the adjusted R-square in two models. Moreover to justify the rejection of hypothesis 2, it could be said that without a proper approach to directly identify the various reasons for choosing a specific accounting method in non-OP-MB companies, it would be difficult to understand managers’ motives to use discretionary accruals in these companies.

Keywords

References

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Journal of Development and Capital
Volume 6, Issue 1 - Serial Number 10
September 2021
Pages 147-161

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History

  • Receive Date: 06 October 2021
  • Revise Date: 16 October 2021
  • Accept Date: 12 October 2021

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