Modern finance texts have long advocated a focus on “free cash flow” rather than on earnings for evaluating firm performance. While U.S. GAAP does not require firms to disclose free cash flow (FCF) information, some firms voluntarily report and emphasize FCF in their financial statements. FCFs are discussed and used in some finance texts, analysts' reports, and financial press articles, yet little theoretical and conceptual guidance exists on how to compute FCF. Hence, the SEC and the FASB have expressed concern about the comparability, consistency, and transparency of these reported measures. This study provides empirical evidence on a set of firms that voluntarily disclose FCF information in their 10‐K and 10‐Q reports filed between 1994 and 2004. The number of firms disclosing FCF information is small but has grown in recent years. We document that FCF definitions vary widely, limiting comparability of FCF disclosures across firms. Our results also indicate that FCF firms are less profitable and more leveraged than other firms in their own industries. Moreover, FCF firms have lower credit ratings and pay out higher dividends. These results suggest that FCF firms provide FCF disclosures to augment reported income and cash flow information. As such, our results suggest that FCF firms view FCF disclosures as an important complement to their traditional reporting practices.
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Research Article| December 01 2006
Voluntary Disclosure of Free Cash Flow Information
Ajay Adhikari, Associate Professor;
Accounting Horizons (2006) 20 (4): 311–332.
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Ajay Adhikari, Augustine Duru; Voluntary Disclosure of Free Cash Flow Information. Accounting Horizons 1 December 2006; 20 (4): 311–332. doi: https://doi.org/10.2308/acch.2006.20.4.311
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