The reliability of mandatory cash expenditure forecasts provided by Australian mining exploration companies in quarterly cash flow reports

Abstract

Purpose

The purpose of this study is to examine the usefulness of pre‐production cash expenditure forecasts issued by Australian mining explorers in their quarterly cash‐flow reports.

Design/methodology/approach

Usefulness is determined by examining compliance and the reliability of forecasts (accuracy and bias) for a sample of 1,760 forecasts issued by 481 explorers in 2005/2006. The cross‐sectional variation in reliability is examined using regression analysis.

Findings

The findings reveal a high level of compliance but significant inaccuracies (median forecast error of around 50 percent of actual expenditure for exploration and evaluation expenditure and 85 percent for development expenditure), and some evidence of forecast bias. Forecast inaccuracy is more prevalent in firms that have poorer performance, greater financial slack, greater cash‐flow volatility, no financial leverage, and for firms that are smaller, in the pre‐development stage, and in the mineral (non‐oil and gas) sub‐industry.

Research limitations/implications

The analysis of forecast usefulness is confined to compliance and reliability. Further research could consider the value‐relevance and predictive ability of these forecasts.

Practical implications

The findings question the usefulness of mandatory forecasting by showing that the information role of forecasts in capital markets is impaired when firms have little discretion over the forecast decision, timing and specificity.

Originality/value

This is the first study to examine mandatory cash expenditure forecasts and makes a significant contribution to the small literature on mandatory financial forecasts.

Citation

Gallery, G. and Nelson, J. (2008), "The reliability of mandatory cash expenditure forecasts provided by Australian mining exploration companies in quarterly cash flow reports", Accounting Research Journal, Vol. 21 No. 3, pp. 263-287. https://doi.org/10.1108/10309610810922503