“The Accuracy of Cash Flow Obligation Estimates: The Case of Mandatory Disclosure of Expected Pension Contributions” by Ms. Xiao XIAO
Ms. Xiao XIAO
Ph.D. Candidate in Accounting
Wisconsin School of Business
University of Wisconsin-Madison
The FASB has proposed that non-financial companies disclose expected cash flow obligations in a standardized form within financial statements in order to provide investors and creditors with comparable and consistent information about companies’ exposure to liquidity risk. Companies argue, however, that it would be too costly to comply with the proposed disclosure requirements and the benefits are not clear. Taking advantage of SFAS 132(R)’s disclosure requirements, this study investigates the benefits of disclosing expected cash flow obligations rigorously by examining the accuracy of companies’ disclosure of expected pension contributions – a major component of companies’ cash flow obligations. I find companies’ actual pension contributions are materially different from their previously disclosed expectation about one-third of the time and that this lack of accuracy is generally caused by companies contributing more than their expectations. Further results suggest that companies lowball expected pension contributions to avoid constraints on their financial flexibility caused by employees with strong bargaining power, and constraints on their ability to pay dividends. I also find evidence that companies lowball to a greater extent when there is greater demand for forward-looking cash flow information (i.e., more analysts issuing cash flow forecasts). Additionally, I find some evidence that creditors provide more effective monitoring over companies’ reporting of expected pension contributions in the presence of more short-term debt.