Experimental Test of Cash Flow Classification shifting: Evidence from Initial Public Offerings in Tehran Stock Exchange

Document Type : Research Paper

Authors

1 Ph.D. Candidate in Accounting, North Tehran Branch, Islamic Azad University, Tehran, Iran.

2 Assistant Professor of Accounting, North Tehran Branch, Islamic Azad University, Tehran, Iran.

10.22103/jak.2022.19699.3726

Abstract

Objective: Since the advent of accounting scandals in the early 21st century, the importance of cash flow statements has increased significantly. Among cash flow statement items, for users of financial information, cash flow operating is important. In recent years, researchers have paid attention to the issue of classification shifting in the items among financial statements and especially the items classification shifting in the statement of profit or loss. However, research on classification shifting in the case of cash flows is relatively rare. Classification shifting is a method that managers can use to change cash flows. In the classification shifting, managers can change the figures among the different classes of financial statements. Classification Shifting can occur between the profit and loss statement or the cash flow statement. One of the concerns that arises especially during the initial public offering and challenges investors with it, the issue is whether the cash flow is positive before the public offering. Information asymmetry between participants in the initial public offering process causes that possible the directors of these companies to have the incentive and opportunity to manipulate the cash flow of operations in the pre-offering period; to show that the cash flow of their operating activities is positive. One of the methods that managers can use to improve their operating cash flow without affecting the net cash flow; The movement of figures between classes is a form of cash flow; Therefore, the purpose of this study is to investigate the classification shifting of cash flows among the cash flow statement.
 Methods: To measure cash flows classification shifting, Negar and Sen (2016) model and using variables based on signs of cash flows )and then net cash flow of investment and financing activities as alternative variables( have been used. First, the five-tier cash flow statement based on Iranian Standard No. 2 was changed into a three-tier one based on the Financial Accounting Standards Board (FASB). Then, using the data of companies that have been going public before the research period, Dichow et al. (1998) model was cross-sectionally fitted in the year-industry level and its coefficients were extracted. In the next stage, based on various criteria, a statistical sample including 70 companies with an initial public offering listed on the Tehran Stock Exchange, in the period 2004 to 2019 was selected. Eventually; the test of research hypotheses for this sample using multiple regression is based on cross-sectional data model.
 Results: The results on the variables based on signs of cash flow outflows of investment and financing activities show that cash flow outflows of investment activities as well as cash flow outflows of financing activities have a significant positive relationship with unexpected operating cash flow. The results on the variables based on signs of cash flow from investment activities and financing showed that the cash flow of investment activities has a significant negative relationship with the flow of unexpected operating cash. However, the cash flow from financing activities has no significant relationship with unexpected operating cash flow. Also, the results of appling the variables of net cash flows from investment and financing activities indicate that there is a significant negative relationship between net financing cash flow and unexpected operating cash flow; But net investment cash flow has no significant relationship with unexpected operating cash flow.
 Conclusion: Investors generally view operating cash flow as an important measure of operating performance that can have a important impact on their decisions. This variable becomes very important when companies do not have trading history and public release of their financial statements before offering. Given the information asymmetry that exists between participants in public offerings, it is important for investors that these companies did not transfer cash flows between different classes of cash flow in the year before the launch. Research findings indicate that these companies, in the year before offering to the public, part of the operating cash outflows are transferred to the investment or financing cash outflows and part of the investment cash inflows are transferred to the operating cash inflows. In general, the findings support the involvement of companies with an initial public offering in the cash flow classification shifting in the year before the offering. The findings of this research can be effective in the decision making of investors who intend to buy the shares of these companies. Therefore, users of financial information as potential investors, lender, and analysis should consider the effects of cash flow classification shifting the year before the initial public offering in their decision-making when buying public offering shares.

Keywords

References

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Journal of Accounting Knowledge
Volume 14, Issue 2 - Serial Number 53
September 2023
Pages 53-76

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History

  • Receive Date: 16 June 2022
  • Revise Date: 24 September 2022
  • Accept Date: 03 October 2022

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