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The importance of cash flow disclosure and cost of capital
Author(s) -
Kent Richard Anthony,
Bu Di
Publication year - 2020
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12382
Subject(s) - cash flow , equity (law) , cost of capital , cost of equity , business , variance (accounting) , ex ante , econometrics , equity capital markets , economics , finance , monetary economics , actuarial science , accounting , microeconomics , private equity , incentive , political science , law , macroeconomics
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.