The determinants of the voluntary disclosure of Free Cash Flows (FCF) by JSE listed companies

Abstract

There has been growing interest in Free Cash Flow (FCF) in the areas of finance and accounting as the debate for value relevance continues. FCF in South Africa falls under the category of Alternative Performance Measures (APMs) according to the Johannesburg Stock Exchange (JSE) classifications. FCF disclosure is voluntary in the financial statements/annual reports and this study aims to examine the determinants of that voluntary disclosure over the 5 years 2014-2018 for JSE-listed companies. A quantitative approach using secondary data was followed and 157 JSE listed companies were selected over the 5 years 2014 to 2018. The study investigated nine independent variables and hypotheses. The independent variables were FCF margin, change in Earnings per Share (EPS), Dividends per share(DPS), Capital Intensity (CAPI), Leverage (LEV), Foreign Listing (FORLIST), Sales Growth (SG), Size (SIZE) and age since incorporation (AGE). The categorical dependent variable was Free Cash Flow Voluntary Disclosure (FCFVD), which was coded/categorised as 0, 1 and 2 according to the level of FCF disclosure. The variables of FCF Margin, CAPI, SIZE and FORLIST were found to be significant as the determinants of FCF voluntary disclosure by the South African JSE listed companies. The main findings of the research relating to the wide FCF nomenclature by JSE companies lead to challenges in comparison of FCF information by users of financial statements. The recommendation is for the JSE and the South African Institute of Chartered Accountants (SAICA), in collaboration with industry bodies and other key stakeholders, to develop a framework for the definition and calculation of the top five FCF names/measures. Other proposed areas of further research are FCF managerial manipulation of compensation schemes/metrics and share price performance, further sectorial FCF disclosure trends/analysis, extending the study for a longer period and to include the financial and real estate sectors. This study contributes to the FCF voluntary disclosure body of international literature and initiates this area of research in South Africa. The study is of significance as bridging the gap and broadening the understanding of FCF disclosure in South Africa. The aim of this research is to assist companies in their FCF voluntary disclosure practices and at the same time, to assist regulators in considering the need to regulate the reporting practices of the FCF, in particular, when the JSE finalises its regulatory criteria for the reporting of APMs to listed companies