Non-Articulation between Financial Statements, Cash Flow Management, and Credit Risk

• In Event: Credit Risk

Abstract

Prior studies document the prevalence of non-articulation between (1) changes in noncash current assets and in current liabilities from comparative balance sheets and (2) their corresponding changes on the indirect-method statement of cash flows. Labeling the difference between these two changes as non-articulation amounts, we find that (1) non-articulation amounts are positively associated with abnormal operating cash flows (OCF), a proxy for cash flow management, (2) larger absolute non-articulation amounts are associated with lower persistence of and higher volatility in OCF, (3) larger absolute non-articulation amounts are associated with greater default risk, higher yield spreads, higher likelihood of loan collateral, and shorter loan maturity. Taken together, our findings suggest that non-articulation amounts capture cash flow management and, consequently, absolute non-articulation amounts contain important information about the risk and uncertainty of a firm's business operations.

Authors

• Hong Xie, University of Kentucky

• Guojin Gong, The Pennsylvania State University

• Kai Zhu, Shanghai University of Finance and Economics

• David A Ziebart, University of Kentucky