Using Operating Cash Flow Data to Predict Financial Distress: Some Extensions

Abstract

Recently, financial statement users and regulators of publicly reported financial accounting data have argued in favor of disclosure of detailed information on firms' current operating cash flows (Harris et al. [1980], FASB [1981], Smith [1982], and Thomas [1982]). The FASB suggests that such disclosures will allow users to assess better amount, timing, and uncertainty of future cash flows. It states that the greater amount of future net cash inflows from operations, greater ability of enterprise to withstand adverse changes in operating conditions [1981, p. 11]. The presumption that historical operating cash flows enable better assessments of future cash flows, however, is based on intuition rather than on empirical evidence (Griffin [1982]). Our study was conducted to assess whether operating cash flow data and related measures lead to more accurate predictions of bankrupt and