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We examine whether the choice of cash flow disclosure under International Accounting Standard 7 has an influence on the cost of capital incurred by Australian listed companies. Results indicate that indirect method companies incur a significantly higher ex-ante cost of equity than direct method companies using a combined equity model approach. We also demonstrate that using an optimal weighted combination of equity models reduces model variance and bias compared to using a single equity model. Our findings support mandating the direct method and have the potential to induce companies to report the direct method to increase company value.

Purpose The purpose of this paper is to examine the effectiveness of voluntary governance mechanisms in Australia. Design/methodology/approach This study identifies similar choices of corporate governance by Australian firms and tests the effectiveness of the choices made based on the earnings quality of reported firms. Cluster analysis is conducted using governance best practice variables, firm size and an earnings quality variable. Findings This paper’s results support the voluntary governance approach for smaller firms, but suggest that mandatory governance requirements could be beneficial for larger firms. Evidence suggests that a benefit accrues for larger firms with the adoption of governance best practice. Cluster analysis indicates that larger firms tend to exhibit higher levels of adoption of governance best practice than smaller firms. Originality/value This paper adds to the literature by providing important information regarding the suitability of adoption of voluntary governance mechanisms in Australia.

This study conducts multiple approaches to identify whether earnings benchmarks are an indicator for earnings management within the Australian market. We investigate firms reporting small positive earnings and small positive earnings changes, referred to as benchmark beaters. Accrual quality models, earnings distributions and earnings persistence measures are applied to identify whether benchmark beating firms are manipulating earnings. Our findings suggest that the small positive earnings benchmark attracts earnings managers. However, we do not identify any evidence to indicate that the positive earnings change benchmark is a signal for earnings management.

This thesis examines whether cash flow disclosure under International Accounting Standard (IAS) 7 has an influence on the degree of information asymmetry incurred by market participants. We evaluate the impact of cash flow disclosure for ASX (Australian Securities Exchange) listed companies and its association with value relevance, prediction of future cash flows, earnings and cost of capital. The following three essays in this thesis demonstrate that the type of cash flow disclosure reported by ASX listed companies can change the amount of information asymmetry experienced by investors. Essay 1 examines cash flow disclosure under IAS 7 for ASX listed companies from 2007 to 2014 to assess the value relevance of disclosing the direct or indirect method statement of cash flows. Evidence suggests that Australian investors are at an information advantage when companies report the direct method statement of cash flows. We find that direct operating cash flow components have a higher association with a company’s share price compared to the indirect method. Essay 1 also demonstrates that reported operating cash flow components provide a stronger valuation signal than estimated operating cash flow components. Direct operating cash flow components are incrementally useful for companies with positive net income and operating cash flows, high growth, high market leverage and industry leverage. Moreover, the direct method has a higher association with a company’s share price for large companies and companies with above average length operating cycles. Essay 2 evaluates whether the choice of cash flow disclosure under International Financial Reporting Standards (IFRS) 7 influences the ability of market participants to predict the operating cash flow and earnings of following years. Using Australian listed companies from 2007 to 2014 our results indicate that users can predict future operating cash flows and earnings more accurately using the direct method statement of cash flows. Essay 2 also demonstrates that operating cash flow is a more accurate measure for predicting future operating cash flows and earnings compared to estimated operating cash flow components. This result implies there is no benefit to investors for estimating operating cash flow components. Direct operating cash flow components also forecast operating cash flows more accurately for companies with transient earnings. Similarly, the direct method predicts earnings and operating cash flows more accurately for companies with moderate cash flows and transient earnings. Essay 3 examines whether the choice of cash flow disclosure under IAS 7 has an influence on the cost of capital incurred by ASX listed companies. A matched pairs sample is created using replacement to assess whether cost of debt or equity is associated with cash flow disclosure. Companies reporting the indirect method on average pay a higher cost of debt by 100 basis points although this result is not significantly different from companies reporting the direct method. Company size and interest coverage are both significant at a 1 per cent level in explaining the cost of debt. Return on assets (ROA) and leverage are also significant at the 10 per cent level for cost of debt. Cost of equity is examined using the Capital Asset Pricing Model (CAPM) with no evidence to suggest that cash flow disclosure is associated with a company’s cost of equity. Overall, Essay 3 demonstrates that the cost of capital incurred by ASX listed companies is not related to their choice of cash flow disclosure.