The Incremental Information Content of the Cash Flow Statement: An Australian Empirical Investigation

Abstract

The general objective of the present study is to investigate and assess the incremental information content of cash flow disclosures as required by the AASB 1026 “Statement of Cash Flows”. This test addresses the issue of whether a change in cash flow components has the same relationship with security prices as that in earnings. Several previous studies indicate both income and cash flow statements may be mutually exclusive or mutually inclusive statements.The data to test three hypotheses came from companies listed on the Australian Stock Exchange for the period of 1992 to 1997, a subsequent period of the requirement to apply AASB 1026. General results from hypothesis tests indicate that cash flows have information content more than that provided by earnings alone and that cash flows have relative information content, given earnings alone. This finding suggests that the cash flow statement and the income statement provide mutually exclusive information. This finding refutes results of previous studies from the USA and UK that indicated cash flow data had less information value than that conveyed by earnings. Other implications and suggestion for further study are also discussed in the paper.