Cash Flow Management, Incentives, and Market Pricing

55 Pages Posted: 2 Oct 2005

See all articles by Ran Zhang

Ran Zhang

Renmin University of China - School of Business

Date Written: September 11, 2006

Abstract

This study examines management of operating cash flows, its causes, and the market's reaction to such management. Applying a Burgstahler and Dichev (1997)/Degeorge et al. (1999) type methodology and the best-fitted distribution method, I find indications that managers take actions to report positive operating cash flows, avoid missing analyst cash flow forecasts, and meet the cash-dividend target. My results also indicate that certain firm characteristics are associated with the magnitude of cash flow management. The persistence test shows that the persistence of cash flows and earnings decreases with the increasing magnitude of abnormal cash flows. The Mishkin (1983) test results show that the market rationally anticipates the lower persistence of abnormal cash flows compared to normal cash flows, but it nevertheless underprices both components of cash flows.

Keywords: cash flow management, earnings management, cash dividends, market efficiency

JEL Classification: M4, G14

Suggested Citation

Zhang, Ran, Cash Flow Management, Incentives, and Market Pricing (September 11, 2006). Available at SSRN: https://ssrn.com/abstract=817324 or http://dx.doi.org/10.2139/ssrn.817324

Ran Zhang (Contact Author)

Renmin University of China - School of Business ( email )

Beijing
China