Free Cash Flow Disclosure in Earnings Announcements

More companies are disclosing free cash flow in their earnings announcements. Companies choose a range of definitions, almost none of which correspond to the theoretical finance definition. The most common definition (in 40% of free cash flow disclosures) is operating cash flow minus gross capital expenditures. From discussions with managers, this definition is chosen largely to keep things simple, especially given the lack of time to explain subtle complexities to investors. There is evidence of both opportunistic and information motives in the choice to disclose. Information variables such as capital intensity and low-quality earnings explain at least as much of the disclosure decision as opportunism variables in all estimations. Opportunism is relatively more evident within initial disclosures, which are more likely when earnings decline and free cash flow is positive or increasing