How do uniformity and flexibility in classification standards affect cash flow statement comparability?

Abstract

I examine the conditions under which uniformity or flexibility in cash flow classification standards affects the comparability of cash flow statement information. The discretion afforded by flexible standards can better reflect differences among underlying transactions, while uniform standards can better constrain managerial reporting opportunism. I exploit differences in flexibility permitted under International Financial Reporting Standards (IFRS) and U.S. Generally Accepted Accounting Principles (GAAP) in classifying cash interest paid, and interest and dividends received. I find that holding constant classification opportunism, cash flow information is more comparable under flexible than uniform classification standards, when cash flows are more heterogeneous in nature relative to peers. Further, I show that classification flexibility impairs comparability when firms have greater opportunistic classification incentives. To my knowledge, this is the first study to directly examine the comparability effect of different cash flow classification standards. This study also provides timely empirical evidence for IASB’s recent effort to improve cash flow statement comparability via changes in classification guidance.