Showing papers on "Cash flow forecasting published in 1994"

The Ability of Earnings to Predict Future Earnings and Cash Flow

Abstract: This paper examines the value relevance of earnings by testing their ability to predict two future benefits of equity investment: earnings and cash flow from operations. Previous research (discussed below) has given an incomplete view of earnings' predictive ability, as it has typically focused on short horizons while ignoring the longer-term benefits that are also valued, as in Ohlson [1990]. I test earnings' ability to predict future earnings and future cash flow from operations1 one through eight years ahead using annual data from

The Cash Flow/investment Relationship: Evidence from U.S. Manufacturing Firms

Abstract: This paper explores reasons for the strong relationship between cash flow and capital investment spending. The equilibrium level of Tobin's q is used to distinguish between liquidity constraints arising from asymmetric information and managerial over-investment of free cash flow. Results suggest that both the Jensen (1986) free cash flow and the Myers and Majluf (1984) pecking order hypotheses are potential explanations for the investment/cash flow relationship. Free cash flow behavior appears to arise most strongly in large, low-dividend firms when they invest in tangible assets. Pecking order behavior appears to arise in smaller, low-dividend firms and in firms making less tangible investments.

The dividend policies of all‐equity firms: A direct test of the free cash flow theory

Abstract: This paper finds support for Jensen's (1986) hypothesis that dividends and debt are substitute mechanisms for controlling the agency costs of free cash flow. We find that dividend payout ratios of a sample of all-equity firms are significantly higher than those of a control group of levered firms. Further, within the group of all-equity firms, firms with lower managerial holdings have higher payout ratios. These results hold after controlling for free cash flow and growth rates. Overall, our evidence suggests that dividends and managerial ownership are substitute mechanisms for reducing agency costs in all-equity firms.

The incremental information content of earnings, working capital from operation and cash flow

Abstract: Prior studies have documented the information content of earnings for share prices but have not provided conclusive evidence on the incremental information content of working capital and cash flows from operations.' These studies assume linear relations between abnormal returns and accounting information. In this paper, I extend prior research by allowing for nonlinear relations between returns and each of three performance variables (earnings, working capital from operations [WCFO], and cash flows). Freeman and Tse [1992a] document a nonlinear relation between abnormal returns and unexpected earnings. They argue that as the absolute value of unexpected earnings increases, the "persistence" of earnings declines (Brooks and Buckmaster [1976] and Freeman, Ohlson,

The Valuation of Cash Flow Forecasts: An Empirical Analysis

Abstract: This paper compares the market value of highly leveraged transactions (HLTs) to the discounted value of their corresponding cash flow forecasts. These forecasts are provided by management to investors and shareholders in 51 HLTs completed between 1983 and 1989. Our estimates of discounted cash flows are within 10%, on average, of the market values of the completed transactions. Our estimates perform at least as well as valuation methods using comparable companies and transactions. We also invert our analysis and estimate the risk premium implied by transaction values and forecast cash flows, and the relation of the implied risk premium to firm-level betas, industry-level betas, firm size, and firm book-to-market ratios.

Strategic Business Forecasting: The Complete Guide to Forecasting Real-World Company Performance

Abstract: Introduction Forecasting and Managerial Planning Forecasting, Budgeting, and Business Valuation Forecasting Methods Moving Averages and Smoothing Methods Regression Analysis Multiple Regression Time Series Analysis and Classical Decomposition Forecasting with No Data The Box-Jenkins Approach to Forecasting Models Based on Learned Behavior - Markov Model and Indirect Methods What are the Right Forecasting Tools for You? Applications Financial and Earnings Forecasting Cash Flow Forecasting Analysis of Cost Behavior and Cost Prediction Bankruptcy Prediction Forecasting Foreign Exchange Rates Interest Rate Forecasting Technological Forecasting Forecasting for the 21st Century Glossary Appendix Index

The relationship between dividend changes and cash flow: an empirical analysis

Abstract: It is often assumed that cash flow affects dividend payout. This study provides evidence on the incremental information content of cash flow numbers over Profits and Previous Year's Dividends (Lintner's model) in explaining changes in cash dividends. It further examines whether different measures of cash flow differ in information content for dividend-increasing and dividend-decreasing firms. Lintner's model of dividend changes is robust across firms with either dividend increases or decreases. The null hypotheses, that no definition of cash flow adds to the model, could not be rejected for any of the definitions.

Contractors’ financial budgeting using computer simulation

Abstract: Contractors’ budgets are often performed on an overall basis. Changes in strategies and mix of contracts are very difficult to evaluate on such a basis. Thus, the accuracy of current budgets is in question. A new approach has been developed to perform contractor's budgeting, by generating and integrating individual current and future projects. The principle of simulation was introduced to generate possible scenarios according to the specified strategies and the expected environment. The model was tested using various verification techniques and was confirmed to be a reliable simulation tool.

Finance Constraints or Free Cash Flow? The Impact of Asymmetric Information on Investment

Abstract: Two explanations characterize the nature of information asymmetries in corporate investment-financing decisions. Models based on finance constraints argue that information-driven cost differentials between internal and external finance may leave profitable investment projects unexploited. Models based on the agency costs of free cash flow suggest that managers increase their utility by wasting resources on unprofitable investments. This paper uses firm-level panel data to empirically compare a model of asymmetric information motivated by finance constraints against the free cash flow alternative by examining the response of firms' investment to changes in internal and external finance. The findings suggest that both finance constraints and agency costs are present in the capital markets.

Cash flow accounting : international uses and abuses

Abstract: "Cash Flow Accounting" explores the usefulness of the funds flow statement and its replacement by the cash flow statement. The book begins with an analysis of accounting history and of the role of accountants in advising investors and creditors. It then goes on to review both the funds flow statement and the cash flow statement in terms of their history, geographical spread, usefulness to investors and lenders and incremental information content in a global context. The discussion explores whether the new cash flow statement satisfies the aspirations of the old funds statement better than the original statement did. Readers are invited to examine actual funds and cash flow statement. Full cash flow accounting is also critically examined along with the contribution of information overload theories in helping us understand the size of the gap between the actual and potential usefulness of accounting statements. The book concludes with suggestions as to how future studies of accounting usefulness could contribute to enhancing the role of accounting as the "language of business".

Using Fuzzy Logic in Corporate Finance: An Example of a Multinational Cash Flow Netting Problem

Abstract: Recent globalization of markets has led to corporate activities that span numerous national boundaries within a single multinational corporation. We address the particular problem of cash flow management in a multinational setting. Uncertainty regarding changes in exchange rates, differences between currency bid and ask prices, possibly unknown changes in both lending and borrowing rates, and uncertain cash flows from subsidiaries make this problem difficult to specify in a traditional crisp environment. In this paper, we show how fuzzy programming techniques can be employed to handle the general problem of multinational cash flow netting. We also provide a specific numerical example comparing the results of the crisp and fuzzy contexts with the aid of sensitivity analysis.

Cash flow management network models with quantity discounting

Abstract: Cash flow management concerns the financial control and planning of a firm's net cash inflows and outflows. In this paper, we develop a network model to represent cash flow problems that involve a decrease in marginal costs (or an increase in marginal revenues) as the volume of cash increases. This type of problem, referred to as quantity-based discounting, is converted to a minimum concave cost network flow model. By making this conversion, we are able to solve efficiently the quantity-based discounting problem using established algorithms. A short-term money market investment problem is used to illustrate the mathematical models developed in this paper.

Modeling Insurance Cash Flows for Universal LifePolicies

Abstract: This paper develops a methodology that can be used by insurers to construct predictive models for their own insurance cash flows. The insurance cash flow components evaluated include premium flows, policy loans, and cash value surrenders. Also, the paper evaluates several hypotheses in the insurance literature that attempt to explain insurance cash flows. Though the results are theoretically consistent, they produce some interesting contrasts to findings of similar studies for whole life policies. For example, these results confirm that: (i) the credited rate strategy is important to policy performance; (ii) the emergency fund hypothesis appears to apply to policy loan utilization, premium payments, and total insurance cash flows; (iii) the arbitrage potential with regard to policy loans is reduced; and (iv) direct recognition of policy loans seems to be effective in reducing the disintermediation risk of traditional whole life insurance policies with fixed policy loan rates. Although policyholders do increase their use of policy loans as inflation increases, the overall results suggest that they tend to increase contributions to their universal life policies in order to maintain levels of protection in real terms. Finally, interest rate risk does exist for companies issuing universal life because changes in market interest rates lead to decreases in premiums and in total insurance cash flows. This lends support to the alternative funds hypothesis.

Financing Constraints and the Role of Cash Flow from Operations in the Prediction of Future Profitability

Abstract: In this paper, we identify the economic contexts in which cash flow from operations (CFO) provides information about future profitability that is incremental to the information provided by current earnings. Prior research has yielded weak, inconsistent results that suggest that CFO provides incremental information in only extreme situations.’ In contrast, we provide strong evidence that CFO is value relevant across a broad class of observations. This paper is motivated by Bernard and Stober (1989, p. 648) and Wilson (1987, p. 320)’ who conclude that further progress in explaining the incremental information provided by cash flow will require an understanding of the economic contexts in which accrual earnings and cash flow disclosures are interpreted, and by Bowen, Burgstahler, and Daley (1987, p. 746), who suggest that market participants use CFO as a signal about liquidity. We use economic theory to show that CFO provides incremental information about a firm’s financing opportunity set. We rely on the work of Myers (1984) and others, who document that the existence of market imperfections gives rise to a financing hierarchy. When internal funds are preferred to external funds as a source of investment financing, the level of a firm’s investment expenditures will be influenced by the firm’s ability

The economics of cash shortage

Abstract: Many economies of the former Soviet Union have experienced cash shortages: people with demand and savings deposits in the banking system are unable to convert them into currency. Usually this is attributed to the common use of the ruble. The author argues otherwise. According to him: (a) cash shortages are manifestations of financial disintermediation: the banking sector is unable to attract enough voluntary deposits; (b) cash shortages allow the government to hold inflationary pressures in check; (c) solutions to the cash shortage problems that rely on printing newcurrency will lead to accelerating inflation. More appropriate solutions (increasing the nominal interest rates, for example) involve reversing the economic incentives to financial disintermediation. Excess demands for cash reflect conditions in financial markets. The phenomenon of cash shortage is related to the concept of shallow formal financial markets. This shallowness is recent in the former Soviet Union. The burst of inflation in early 1992 removed the"ruble overhang"and greatly reduced all indicators of financial depth. Continuing shallowness is a direct consequence of financial disintermediation because of negative real interest rates.

Determinants and financial consequences of the method of payment in corporate acquisitions

Abstract: Although wide variation in the type of consideration offered in corporate acquisitions is observed in practice, little is known about how bidders or targets choose the method of payment in takeovers Further, several empirical studies report that shareholders of both targets and bidders earn higher returns in cash offers than in equity offers, but the reasons for this more favourable impact of cash offers have not been empirically established This study attempts to fill these gaps in the literature by addressing three research questions:- 1) What factors determine the method of payment used by bidders in corporate acquisitions? 2) How do target shareholders choose between cash and equity when the bidder has offered "equity with a cash alternative" as the method of payment? 3) Why are bid premia higher in cash offers than in equity offers? In examining how bidders choose the method of payment this study in contrast to all previous studies, emphasises that there is a simultaneous and joint relationship between the method of payment and the choice of accounting policy Accordingly, we adopt a simultaneous equations framework with payment method and accounting policy choices as endogenous variables Our results show that payment method has a significant impact on accounting policy choice whereas the reciprocal effect is not significant This result reflects the fact that UK accounting rules have eroded the distinction between merger and acquisition accounting which is more clearly observed in the US We study how target shareholders choose the payment currency by examining how a choice is made between cash and equity when the bidder has offered "equity with a cash alternative" as the method of payment We find that information about the opportunities for realising synergies in the acquisition have no influence on the choice of payment method by target shareholders The choice is based primarily on the difference in value between the cash and equity offers This is consistent with the theoretical predictions based on the efficient market hypothesis, that all publicly available information about a security can be reduced into a single index, namely the share price We tested some of the popular explanations which have been advanced in the literature to explain the higher returns to cash offers The capital gains tax compensation and the wealth redistribution hypotheses are rejected Information asymmetry between managers and shareholders can explain some of the higher returns observed in cash offers This is consistent with signalling models which predict that the use of equity to finance investments signals a belief by managers that their shares are overvalued

Cash Flow and the New Taxonomy of Financial Ratios for Manufacturing Firms

Abstract: Analys ts derive a broad array of financial ratios from published financial reportS to assess business enre rprise perfonnance. Only a few ratios, however, yield meaningful iJlSight. The a do ption o f Statement of Financial Accounting Standards (SFAS) No. 95, 'fhe Statement o f Cash Flows . by the Financial Accounting Standards Boatd (FASB) in 1987 provided the impetus for the recent interest in cash flow ratios. This study explores the usefulness o f cash flow ratios, relative to accrual-based financial ratios. in ~ the performance of manufacturing finns. Our findings show that cash flow ratios render bOth complementary and unique insight regarding a manufacturing finn' s perfonnance and its "ability to pay." Therefore. we recommend that financial ratio analysis of a manufacturing firm should include both accrual-based and cash flow ratios.

A survey of contractors’ corporate planning and financial budgeting

Abstract: The authors found that contracting‐only firms were more vunerable in cases of inaccurate budgets; fluctuations in working capital could lead to the bankruptcy of a contractor who could not raise loans quickly. Two reasons were identified as the cause of inaccurate budgets: forecasting on an overall basis and the inability to take into account accurately variations in strategies and the environment.

Total Cash Management: A Company-Wide System for Forecasting, Managing, and Improving Cash Flow

Abstract: Improving the Productivity of Company Cash How Your Business Will Benefit from TCM The Real Value of Cash to Your Business How Your Operating Decisions Impact Cash Flows Better Expense Control is the Road to Cash Flow Turn Accounts Receivable into Cash TCM for Marketing--Increase Sales Through Pricing Creative Inventory Management Will Produce Cash Payroll, Benefits and the Cash Role of Human Resources Mergers and Acquisitions--Top Management's Responsibility Purchasing and Leasing Fixed Assets--Where's the Payoff? The Financial Manager's Role in Total Cash Management Developing the TCM Team Forecasting Cash Flows and Cash Balances Managing Your Bank the Way You Manage Your Cash Put Your Excess Cash to Work--Fast! Is Short-Term Borrowing a Solution to Cash Flow Problems? Easing Your Problems by Using Long Term Debt and Equity Summary--Cash Is King: Install TCM Now! Appendix: Reporting Cash Flows Using SFAS 95 as a Management Tool

A Process Analysis of Lenders' Use of FAS 95 Cash Flow Information

Abstract: This study uses concurrent verbal protocol analysis to examine the decision processes of lenders as they evaluate the financial information of a loan applicant. Of specific interest is the lenders' use of Statement of Financial Accounting Standards Board No. 95 (FAS 95), Statement of Cash Flows, in that decision process.