Financing policy, executive stock options and cash flow forecasts

This article investigates the relationship between management voluntary disclosures of cash flow forecasts and external financing policy, earnings management, earnings forecasts and executive stock option compensation. We find that management is more likely to issue cash flow forecasts when a firm has external financing needs or when a firm has more executive stock option compensation. However, management is less likely to disclose cash flow forecasts when a firm has more earnings management. Consistent with the prior research, we document that a firm with high dividend payout, large asset value and high profitability tends to disclose cash flow information to convey good news. Further, if analysts have released earning forecasts, management is likely to issue cash flow forecasts to complement those analyst earnings forecasts. If analysts release cash flow forecasts, management is less likely to disclose cash flow forecasts to avoid issuing repeat forecasts. Our results, therefore, suggest that different incentives drive management disclosure decisions regarding cash flow forecasts in actual practice.