Comparative Prediction Relative to Reporting of Operating Cash Flows for Tehran Stock Exchange- Listed Companies

This study examines the information content of alternative approaches to presenting cash flow from operations (CFO) data. The predictive ability of derived historical data reflecting the direct method compared with archived indirect method-based data, and, cash receipts and payments data in comparison with net amounts are evaluated with respect to future cash flows. In order to test the research questions, multivariate regression analyses are used, focusing on a sample of 65 firms listed on the Tehran Stock Exchange (TSE) between 2001 and 2007. For the purpose of comparing the predictive ability of presented data, modified R2 and Mean Absolute Percentage Error (MAPE) are utilized. The results fail to reveal any advantage for direct versus indirect-method data. This may be due to problem of articulation of the balance sheet and income statement producing nontrivial errors in the estimation of direct method-cash flows, i.e. cash received from customers, and cash paid to employees and suppliers. However, the findings do suggest the superiority of disaggregated over net cash flows in predicting CFO. The results imply that in developed or developing countries where cash flow data are reported under the indirect method, by expressing a strong preference for direct, disaggregated CFO reporting, coupled with appropriate incentives, regulators could increase the quality of financial reporting