What Determines Management Cash Flow Forecasts in the Oil and Gas Industry?

Abstract

This study examines the determinants of management cash flow forecasts in the oil and gas industry. The oil and gas industry is one of the most important industries worldwide. Oil is considered the number one commodity, which accounts for roughly ten percent of world trade (Wright and Gallun 2008). The industry is characterized by unstable prices, diminishing supplies, and increasing demand. As suggested by prior research and current accounting standards, cash flow information is especially relevant for understanding the operations of oil and gas firms. We identify firm characteristics that affect oil and gas firm managers’ decision to forecast cash flows. We find that managers of the firms 1) in financial distress, 2) with higher leverage, 3) obtaining more debt in the following year, 4) with more intensive capital investment, and 5) with higher earnings volatility are more likely to issue cash flow forecasts. The decision to provide such forecasts is negatively related to growth opportunities and cash flow volatility. Our study contributes to the understanding of why some oil and gas firms provide specific guidance of cash flows beyond the required disclosure, while others do not.

Keywords: Management cash flow forecasts, voluntary disclosure, oil and gas industry, earnings forecasts, value relevance.