Segment cash flow statement: an empirical examination of its impact on the lending decision

The purpose of the study is to determine the impact of a segment cash flow statement on the lending decision. Commercial bank loan officers (167) at 90 of the nation’s 300 largest commercial banks were mailed case studies and an experimental questionnaire. Completed questionnaires were returned by 117 loan officers representing 78 banks.

The loan officers were randomly assigned to three experimental groups before the questionnaires were mailed. The control group received only the segment cash flow disclosures required by generally accepted accounting principles. Members of the test groups received a complete segment cash flow statement. The soft drinks group's segment cash flow statement indicated that a stable industry was the sole source of cash while the farm group's revealed that an industry in serious trouble (farm machinery and equipment) was the source of cash. The type of segment cash flow data served as the independent variable.

In the questionnaire, the loan officers were asked to make three independent loan decisions. These were a short-term, an intermediate-term, and a long-term loan decision. The loan officers were asked how much of the requested amount they would loan and the increment above the appropriate prime rate they would charge for each loan.

MANOVA was used to determine if the type of segment cash flow data had an impact on the following dependent variables: a dummy variable indicating whether a loan was granted, the amount loaned, and the interest rate charged. Tests for variance effects were also conducted.

Results indicate that the "good news" that a stable industry was the cash source resulted in more favorable loan decisions (more loans were granted) for long-term loans. The "bad news" that an industry in trouble was the cash source resulted in less favorable loans (fewer loans were granted and smaller amounts were loaned when a loan was granted) for the short-term loans. Members of the soft drinks group exhibited more consensus in their decisions than the control group for the short- and long-term decisions. This research suggests that a segment cash flow statement contains relevant information for the lending decision.