Do Firms Round Up Operating Cash Flows?

Abstract

This study examines the rounding phenomenon in operating cash flows for firms listed in the three major U.S. stock exchanges (i.e., New York Stock Exchange, NASDAQ, and American Stock Exchange) and the U.S. Over-the-Counter (OTC) market. It finds that firms listed in the three major stock exchanges roundup earnings, but they do not round-up operating cash flows; while firms listed in the OTC market roundup both earnings and operating cash flows. Overall, the results from this study provide consistent evidence that firms have incentives to round up operating cash flows to paint a rosy picture of the firms’ performance; however, it is more difficult to round-up cash flows than to round-up earnings. Therefore, in an environment where the rules and disclosure requirement is strict (i.e., the three major U.S. stock exchanges), firms do not have the opportunities to round-up cash flows; but in an environment where the rules and disclosure requirement are less strict (i.e., the OTC market), firms actually do round-up cash flows in practice.