The Information Content And Manipulation Of Cash Flows

Many researches have been done on the usefulness of accounting information since the first empirical research of Ball and Brown (1968). However, the former researches barely focused on the usefulness of cash flows. Meanwhile, most of the researches of stock price reaction based on the well developed western capital market, and the Chinese capital market has its own characteristics, which will affect the way the investors using the accounting information, and further more affect the relevance between accounting information and stock price.Based on Chinese capital market, this paper tries to discuss on the relation between the accounting information and stock price (earnings) in Chinese capital market by empirical studies, and to find out the incremental information content of cash flows information beyond earnings information. Furthermore, this paper studies the manipulation problems of cash flows.There are 5 chapters:Chapter 1, the usefulness of cash flow information. This chapter expatiates on four aspects of value relevance theories. First, this chapter explains the relationship between accounting information and stock price, the usefulness of accounting information is revealed by stock price reactions. Second, based on accrual basis accounting limitations and accounting earnings manipulation, this chapter analyses the cash flows under the cash basis accounting. Under the accrual basis accounting, the recognition of revenues is based on it will bring economic benefit inflows, and the recognition of expenses are matched with the revenues of the same period. On the contrary of cash flow information on cash basis, the recognition and calculation of accounting earnings has manipulation space, especially the accrual items of earning numbers, which are twisted more often than the cash flows. Finally, the argument of the importance of cash flows and earnings information reveals the significance of cash flow information.Chapter 2, the test of cash flow information content. This chapter studies the information content of cash flows based on the sample of the listed companies during the period 1998-2005. Evidence shows: (1) Net increase in cash and cash equivalents per share, cash from operating activities and cash from investing activities per share have information content, while net cash flow per share from financing activities does not. (2) There are economic consequences in the implementing of 2001 new cash flow standard, and the market reaction of cash flow information is stronger after the implementing of the new standard. (3) Net increase in cash and cash equivalents and net cash flows from operating activities have information content in high earning quality companies, and stronger that those in poor earning quality companies. (4) Cash flows from operating and financing activities in reform sample companies have information content, whiles the cash flows from investing activities and net increase in cash and cash equivalents do not have information content in these companies. (5) Industrial test shows that net cash flows from operating and investing activities in manufacturing industry listed companies have information content. In IT industry, only the net increase in cash and cash equivalents has information content. In real estate industry, the net increase in cash and cash equivalents information content, while other cash flows do not. (6) In ST companies, the net increases in cash and cash equivalents and net cash flows from operating and investing activities have information content. The investors are more interested in these two factors in ST companies.Chapter 3, Incremental information content of cash flows. This chapter makes empirical studies on the information content difference between accounting earnings and cash flows, and the incremental information content of cash flow information. Evidences show: (1) Accounting earnings has information content. (2) There is no significant difference of the information content between accounting earnings and cash flows in reformed companies, and the net cash flows from operating and financing activities have incremental information content. (3) There is a significant difference of the information content between accounting earnings and cash flows in high-tech companies and real estate industries, but the cash flow information of both industries do not have the incremental information content. (4) There is no significant difference of the information content between accounting earnings and cash flows in ST companies, and only the net cash flows from operating activities has incremental information content in ST companies.Chapter 4, the manipulation of cash flow information. Firstly, this chapter analyzes the motivation and methods of cash flow information manipulation. With more and more attention attached to cash flow information, the management will manipulate the cash flow when facing a bad cash flow performance. The methods are: (1) adjusting the structure and size of cash flows from operating activities; (2) adjusting the detailed items in the three major sections; (3) controlling the whole structure and size of the enterprise cash flows. Secondly, this chapter gives empirical evidences on the manipulation situation of the non-operating cash flows. Evidences shows that the manipulation behavior exists, especially in the companies where actual net operating cash flows below zero. The item"other cash received relating to operating activities"is most frequently used manipulation method. Thirdly, this chapter applies theoretical analyses and empirical test on cash flow manipulation problem in re-financing companies. Last, this chapter discusses the distinguishing of cash flow manipulation, and brings forward some suggestions to prevent the manipulation.Chapter 5, the research conclusion, limitation and suggestion. This chapter concludes the main research conclusions, points out some limitation, and explains the reasons why the cash flow information content and its incremental information content are not significant in individual time sample and sample groups. Finally, this chapter makes some suggestions on how to improve the implementing of cash flow information.