Free Cash Flow Disclosure in Earnings Announcements

Abstract

More companies are disclosing free cash flow in their earnings announcements. Companies choose a range of definitions for disclosed free cash flow, none of which correspond to the theoretical definition. The most common definition (in 38% of free cash flow disclosures) is operating cash flow minus capital expenditures. We provide evidence that opportunistic motives are a factor affecting the disclosure decision, especially for initial disclosures; initial disclosure is more likely when earnings decline and free cash flow increases. However, disclosure is more strongly associated with our proxies for information; firms are more likely to disclose when we expect free cash flow to be a more useful metric such as when the firm is capital intensive and when earnings do a poorer job of communicating performance. Conditional on disclosure, individual adjustments are also related to several of our proxies for information. Our overall conclusion is that, although there is some evidence of opportunism, free cash flow disclosure is primarily driven by the goal of providing better information to investors.