Economic determinants of asymmetric timeliness in real activities

Operating cash flow (CFO) has long been perceived as the key input in valuation models and a fundamental measure of firm performance. CFO, based on actual cash transactions, is unlikely to be affected by accounting choices. Recent studies document an important attribute of CFO, namely CFO asymmetric timeliness, which refers to the extent to which cash flows reflect bad news more quickly than good news. Despite the consistent evidence of CFO asymmetry, its causes remain largely unexplored. Moreover, existing explanations exclusively focus on managerial asymmetric adjustments in real business operations, but have largely ignored the demands from external parties. This study proposes and examines two new explanations for CFO asymmetry, namely cost stickiness and conservatism demand. It also compares the relative importance of different factors in driving CFO asymmetry. Empirical evidence suggests that life cycle, cost stickiness and the demands from equity contracting, litigation and taxation are important determinants, but none of them dominates the others. However, the combination of all these explanations cannot fully explain the presence of asymmetric timeliness in operating cash flows. The results also suggest that life cycle and the litigation demand are largely associated with CFO asymmetry attributable to normal business operations, while the taxation demand is highly related to CFO asymmetry due to managerial manipulation. In contrast, cost stickiness and the equity contracting demand determines both forms of asymmetries. Overall, the results provide important implications for cash flow forecasting and security valuation.