American Accounting Association 2006 Midwest Region Meeting March 30 – April 1 Chicago, Illinois

Friday, March 31, 4:00 p.m. to 5:40 p.m. Concurrent session 4C - Cash Flow, Accruals & Earnings Management (Financial Accounting and Reporting)

Title:   Cash Flow Management, Incentives and Market Pricing

Rania R. Zhang University of Colorado

ABSTRACT:This paper examines operating cash flow management, its causes, and how the market reacts to such management. I find that managers take actions to report positive operating cash flows, to avoid missing analystsˇ¦ cash flow forecasts, and to meet the cash-dividend target. My results indicate that certain firm characteristics are associated with the magnitude of cash flow management. Firms with (1) low accrual management, (2) large magnitude of total accruals, (3) high capital intensity, (4) no financial distress, and (5) small positive cash flow surprises are more likely to engage in cash flow management.

This paper also investigates the persistence and market pricing of abnormal cash flows. The persistence of cash flows and earnings decreases with the increasing of the magnitude of abnormal cash flows. The Mishkin (1983) test results show that the market rationally anticipates the less persistence of abnormal cash flows compared to normal cash flows and it underprices both components of cash flows.

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