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The importance of cash flow disclosure and cost of capital

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  • Richard Anthony Kent
  • Di Bu

Abstract

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.

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  • Richard Anthony Kent & Di Bu, 2020. "The importance of cash flow disclosure and cost of capital," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(S1), pages 877-908, April.
    • Handle: RePEc:bla:acctfi:v:60:y:2020:i:s1:p:877-908
    DOI: 10.1111/acfi.12382
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