Results of consequences of flexibility in OCF classification
In the left side of Table 8, panel A, we compare the 57 OCF-increasing changer sample to itself over time-before and after the reclassification for variables similar to those in the cross-sectional regression. For variables created as averages over the sample period, averages are based on the periods before and after the reclassification. The significantly positive differences in the means and medians of the difference in OCF (reported minus pro forma) and interest paid reported in financing are a function of the criteria for inclusion as an OCF-increasing changer. In addition, we find that equity issues and analysts' forecast coverage are higher in the period after the change. The mean and median profitability of changers is significantly lower after the change.
On the right side of Table 8, panel A, we compare the 57 OCF-increasing changers to the control sample. We find significant differences in the means, medians or both of the difference in OCF (reported minus pro forma), interest paid reported in financing, equity issues, analysts' forecast coverage, cross-listed in the US, and industry.
Table 8, panel B, presents results of a logistic regression with the dependent variable OCF-Increasing Classification Change equal to one if the firm increased OCF by making a classification change and zero otherwise. Results indicate that firms with greater equity issuance are more likely to make OCF-increasing choices. Any valuation enhancement related to higher reported OCF would increase equity issuance proceeds, but the relation is not direct, particularly as equity issuance is measured historically. We find that analyst forecast coverage is negatively associated with changing, consistent with analysts' cash flow forecasts serving some deterrent role.
