Empirical Research On The Manipulation Time And Management Mechanism Of Cash From Operations

Cash from operations(CFO) and earnings are complementary measures of firm performance. Recent studies document that a growing proportion of firms’analysts and managers issue cash flow forecasts.One potential explanation for this trend is that investors are paying more attention to CFO. Many financial accounting textbooks and investment advisors advocate comparing earnings to CFO,and consider a wide disparity a red flag on the basis that CFO is more "real" than earnings. However, cases of cash flow misreporting have raised concerns that managers exercise discretion in financial reporting and in the timing of transactions to inflate reported CFO.Despite these concerns, there is limited research about when and how firms manage reported CFO.This study examines the following questions:(1) What are the incentives to upward manage reported CFO?(2) What are the mechanisms through which firms manage reported CFO? In this study, CFO management is distinct from earnings management. Specifically, CFO management stems from incentives to inflate reported CFO and not earnings.To the extent that investors focus solely on earnings, CFO would be pointless. However, depending on the firm characteristics, CFO and earnings have different implications for future earnings.For example, executives rank earnings as the most important financial metric to external constituents in general, but consider CFO more important than earnings when the firm is near distress.Empirically, the multitude of transactions that simultaneously increase reported CFO and earnings poses a challenge in distinguishing between CFO management and earnings management. To investigate CFO management as a separate phenomenon from earnings management, I examine how managers use classification and timing to inflate reported CFO. Classification refers to shifting items among the statement of cash flows categories, namely operating, financing, and investing, holding earnings and aggregate cash flows constant. Timing refers to the adjustment of working capital to alter reported CFO, holding earnings constant.I hypothesize that firms inflate reported CFO in response to incentives. I identify four firm characteristics that likely indicate reported CFO is particularly important to investors and, thus,managers have stronger incentives to inflate reported CFO. The firm characteristics are (1) financial distress, (2) a long-term credit rating near the investment/non-investment grade cutoff, (3) the existence of analyst cash flow forecasts, and (4) higher associations between stock returns and CFO.Firstly, to test the hypothesis that firms inflate reported CFO when the incentives to do so are high, I decompose CFO into expected and unexpected components by modeling expected CFO based on Dechow et al. (1998). The results show that unexpected CFO is increasing in incentives to inflate reported CFO.Then i investigate how firms manage reported CFO. Using two specific settings in which earnings are held constant, I examine whether firms use classification to inflate reported CFO. The first setting is, using a sample of firms that restated CFO downward due to classification errors (restatement sample), I find that firms are more likely to restate CFO when managerial incentives to inflate reported CFO are stronger.Next, I investigate whether firms inflate reported CFO by timing certain transactions such as delaying payments to suppliers or accelerating collections from customers.The results show that incentives to inflate CFO are associated with a shorter cycle in the fourth quarter of the yearthat reverses in the next quarter.At last, I conclude the main research conclusions and point out research significance of this study.