An empirical investigation of Statement of Financial Accounting Standards No. 131: The effects on the prediction of future cash flows and financial analysts' cash flow forecast accuracy

In this study, I examine the extent to which the implementation of Financial Accounting Standard Board (FASB) Statement No. 131 (SFAS 131) affects the predictability of future cash flows. I investigate whether segment disclosure under SFAS 131 segment-reporting regime improves the ability to predict future cash flows beyond that of segment data provided under SFAS 14. Specifically, I examine four sub-samples of firms that are classified as increase, decrease, reclass, and no change firms. FASB (1997) and AIMR (1993) assert that more narrowly defined segment information under the SFAS 131 segment-reporting regime should improve financial statement users ability to better predict future cash flows. I test these assertions by investigating whether SFAS 131 improves cash flow predictability by utilizing a cash flow prediction model and financial analysts' cash flow forecast.; My empirical findings suggest that, upon adoption of SFAS of SFAS 131, the cash flows of firms that provided more narrowly defined segment data were more accurately predicted than the cash flows of firms that did not using a next-period ahead cash flow prediction model. However, I also find that changes in segment disclosure resulting from the adoption of SFAS 131 did not significantly improve financial analysts' ability to forecast cash flows. This finding is consistent with financial analysts already having access to this pertinent information prior to SFAS 131, which is documented in Berger and Hann (2002a) and analysts' reports. Overall, my findings indicate that SFAS 131 has been somewhat beneficial for firms that increased their segment disclosure level, but at the same time possibly detrimental, at least in the short horizon, to firms that maintained the same level of segment disclosure upon adoption of SFAS 131. These findings suggest that the initial requirement that cash flows be reported on a segment basis under SFAS 131 may have been warranted in order to help financial statement users better predict future cash flows.