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The Effects of Financial Statement Information Proximity and Feedback on Cash Flow Forecasts

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  • FRANK D. HODGE
  • PATRICK E. HOPKINS
  • DAVID A. WOOD

Abstract

The Financial Accounting Standards Board (FASB) and International Accounting Standards Board (IASB), in their joint Financial Statement Presentation project, are reconsidering the basic format of financial statements. The Boards’ preliminary discussions related to this joint project indicate that they intend to modify the required financial statements to increase the proximity of performance†related information for each reported period. We provide evidence related to this potential change by investigating the effects of financial statement information proximity on investors’ ability to learn the forecast†relevant time series properties of reported cash flows and accruals. We also examine the role feedback plays in this relationship. Our experimental results suggest that nonprofessional investors are able to more quickly learn the relation between current period cash flows and accruals and future cash flow realizations when financial statement information is presented in a single statement rather than separated into two statements. In addition, we find that nonprofessional investors exhibit lower levels of absolute forecast errors and less forecast dispersion when financial statement information is unified into a single statement. Finally, we provide evidence that nonprofessional investors who receive extensive outcome feedback on a single page initially learn more quickly and later, after learning has leveled off, accurately forecast more consistently than do investors who receive extensive or limited feedback spread across two pages. Overall, our results provide evidence on the effectiveness of alternate financial statement presentation formats and the potential usefulness of receiving more extensive feedback.

Suggested Citation

  • Frank D. Hodge & Patrick E. Hopkins & David A. Wood, 2010. "The Effects of Financial Statement Information Proximity and Feedback on Cash Flow Forecasts," Contemporary Accounting Research, John Wiley & Sons, vol. 27(1), pages 3-3, March.
  • Handle: RePEc:wly:coacre:v:27:y:2010:i:1:p:3-3
    DOI: 10.1111/j.1911-3846.2010.01010_3.x
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    Cited by:

    1. Cassell, Cory A. & Myers, Linda A. & Seidel, Timothy A., 2015. "Disclosure transparency about activity in valuation allowance and reserve accounts and accruals-based earnings management," Accounting, Organizations and Society, Elsevier, vol. 46(C), pages 23-38.
    2. Cheng, Mandy M. & Humphreys, Kerry A. & Zhang, Yichelle Y., 2018. "The interplay between strategic risk profiles and presentation format on managers' strategic judgments using the balanced scorecard," Accounting, Organizations and Society, Elsevier, vol. 70(C), pages 92-105.
    3. Sompong Pornupatham & Hun-Tong Tan & Thanyaluk Vichitsarawong & G-Song Yoo, 2023. "The Effect of Cash Flow Presentation Method on Investors’ Forecast of Future Cash Flows," Management Science, INFORMS, vol. 69(3), pages 1877-1900, March.
    4. Qi Chen & Tracy R. Lewis & Katherine Schipper & Yun Zhang, 2017. "Uniform Versus Discretionary Regimes in Reporting Information with Unverifiable Precision and a Coordination Role," Journal of Accounting Research, Wiley Blackwell, vol. 55(1), pages 153-196, March.
    5. Abdullah Jihad Rabaya & Norman Mohd Saleh, 2022. "The moderating effect of IR framework adoption on the relationship between environmental, social, and governance (ESG) disclosure and a firm's competitive advantage," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 24(2), pages 2037-2055, February.
    6. Koonce, Lisa & Leitter, Zheng & White, Brian J., 2019. "Linked balance sheet presentation," Journal of Accounting and Economics, Elsevier, vol. 68(1).
    7. Krumwiede, Kip R. & Swain, Monte R. & Thornock, Todd A. & Eggett, Dennis L., 2013. "The effects of task outcome feedback and broad domain evaluation experience on the use of unique scorecard measures," Advances in accounting, Elsevier, vol. 29(2), pages 205-217.
    8. Blankespoor, Elizabeth & deHaan, Ed & Marinovic, Iván, 2020. "Disclosure processing costs, investors’ information choice, and equity market outcomes: A review," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    9. Anthony C. Bucaro & Kevin E. Jackson & Jeremy B. Lill, 2020. "The Influence of Corporate Social Responsibility Measures on Investors' Judgments When Integrated in a Financial Report Versus Presented in a Separate Report," Contemporary Accounting Research, John Wiley & Sons, vol. 37(2), pages 665-695, June.
    10. Martin, Rachel, 2019. "Examination and implications of experimental research on investor perceptions," Journal of Accounting Literature, Elsevier, vol. 43(C), pages 145-169.
    11. Maria Misiuda & Maik Lachmann, 2022. "Investors’ Perceptions of Sustainability Reporting—A Review of the Experimental Literature," Sustainability, MDPI, vol. 14(24), pages 1-24, December.
    12. Parsons, Linda M. & Tinkelman, Daniel, 2013. "Testing the feasibility of small multiples of sparklines to display semimonthly income statement data," International Journal of Accounting Information Systems, Elsevier, vol. 14(1), pages 58-76.
    13. Alexander Landau & Janina Rochell & Christian Klein & Bernhard Zwergel, 2020. "Integrated reporting of environmental, social, and governance and financial data: Does the market value integrated reports?," Business Strategy and the Environment, Wiley Blackwell, vol. 29(4), pages 1750-1763, May.

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