Showing papers on "Cash flow forecasting published in 2003"

International Corporate Governance and Corporate Cash Holdings

Abstract: Agency problems are an important determinant of corporate cash holdings. For a sample of more than 11,000 firms from 45 countries, we find that corporations in countries where shareholders rights are not well protected hold up to twice as much cash as corporations in countries with good shareholder protection. In addition, when shareholder protection is poor, factors that generally drive the need for cash holdings, such as investment opportunities and asymmetric information, actually become less important. These results are stronger after controlling for capital market development. Indeed, consistent with the importance of agency costs, we find that firms hold larger cash balances when access to funds is easier. Our evidence is consistent with the conjecture that investors in countries with poor shareholder protection cannot force managers to disgorge excessive cash balances.

Why Do Firms Hold Cash? Evidence from EMU Countries

Abstract: This paper investigates the determinants of corporate cash holdings in EMU countries. Our results suggest that cash holdings are positively affected by the investment opportunity set and cash flows and negatively affected by asset's liquidity, leverage and size. Bank debt and cash holdings are negatively related, which supports that a close relationship with banks allows the firm to hold less cash for precautionary reasons. Firms in countries with superior investor protection and concentrated ownership hold less cash, supporting the role of managerial discretion agency costs in explaining cash levels. Capital markets development has a negative impact on cash levels, contrary to the agency view.

Do Persistent Large Cash Reserves Hinder Performance

Abstract: Conservative financial policies are often criticized as serving the interests of managers rather than the interests of stockholders. We test this argument by examining the operating performance and other characteristics of firms that for a five-year period held more than one-fourth of their assets in cash and cash equivalents. Following the five-year period, operating performance of high cash firms is comparable to or greater than the performance of firms matched by size and industry or by a measure of proclivity to hold substantial cash. In addition, proxies for managerial incentive problems, such as ownership and board characteristics, are not unusual and do not explain differences in operating performance among high cash firms. We find that high cash holdings are accompanied by greater investment, particularly R&D expenditures, and by greater growth in assets. For firms that persistently hold large cash reserves, we conclude that such policies support investment without hindering corporate performance.

The Cash Flow Sensitivity of Cash

Abstract: We use the link between financial constraints and a firm's demand for liquidity to develop a new test of the effect of financial constraints on firm policies. The effect of financial constraints can be captured by a firm's propensity to save cash out of incremental cash inflows (the "cash flow sensitivity of cash"). While constrained firms should have a positive cash flow sensitivity of cash, unconstrained firms' cash savings should not be systematically related to cash flows. We estimate the cash flow sensitivity of cash using a large sample of manufacturing firms over the 1971-2000 period and find that firms that are more likely to be financially constrained display a significantly positive cash flow sensitivity of cash, while unconstrained firms do not. Also consistent with our argument, we find that constrained firms' cash flow sensitivity of cash increases during recessions, while unconstrained firms' cash--cash flow sensitivity is unaffected by macroeconomic innovations. The use of cash flow sensitivities of cash appears to be a theoretically justified, empirically useful method to test for the importance of financial constraints.

Cash flow, investment, and investment opportunities: New tests using UK panel data

Abstract: The interpretation of the correlation between cash flow and investment is highly controversial. Some argue that it is caused by financial constraints, others by the correlation between cash flow and investment opportunities that are not properly measured by TobinOs Q. This paper uses UK firmsO contracted capital expenditure to capture information about opportunities available only to insiders and thus not included in Q. When this variable is added in investment regressions, the explanatory power of cash flow falls for large firms, but remains unchanged for small firms. This suggests that the significance of cash flow stems from its role in alleviating credit frictions.

Investment, R&D and financial constraints in Britain and Germany

Abstract: This paper tests for the importance of cash flow on investment in fixed capital and R&D using firm-level panel data in two countries between 1985 and 1994. For German firms, cash flow is not informative in simple econometric models of fixed investment or R&D. In identical specifications for British firms, cash flow is informative about investment, although not about the level of R&D spending conditional on the R&D participation decision. In the UK, we also find that investment is less sensitive to cash flow for R&Dperforming firms, and that cash flow predicts whether firms perform R&D or not. We confirm that these differences do not simply reflect a greater role for current cash flow in forecasting future sales. These results suggest that financial constraints are more significant in Britain, that they affect the decision to engage in R&D rather than the level of R&D spending by participants, and that consequently the British firms that do engage in R&D are a self-selected group where financing constraints tend to be less binding.

Deflators, net shareholder cash flows, dividends, capital contributions and estimated models of corporate valuation

Abstract: Models of corporate valuation based upon a symmetric distribution of information suggest that net shareholder cash flows (the difference between dividends and capital contributions) should have a negative impact on corporate valuation (see, for example, Ohlson, 1989). Using a cross-sectional valuation model approach, a number of studies have empirically investigated this relationship, directly or indirectly. Rees (1997) estimates that dividends have a positive impact on corporate valuation in the UK. He does not estimate the impact of capital contributions, however. In the USA, Rees’ (1997) result is repeated by Hand and Landsman (1999), who also observe a coefficient for capital contributions more in line with symmetric information theory. If these results of a positive relationship between dividends and market value are accepted at face value, they could be consistent with signalling models, based upon an asymmetric

Larger Return to Cash Acquisitions: Signaling Effect or Leverage Effect?*

Abstract: This article investigates the signaling theory and the benefit of debt theory to explain higher returns for bidders offering cash rather than stock, using Standard and Poor’s debt rating reviews and changes. Results imply that cash acquisitions and stock acquisitions have different sources of value creation. Benefit of debt seems to be the main source of value in cash acquisitions, whereas the synergy effect outweighs the leverage effect in stock takeovers. Although stock appears to be used for the most unsuccessful acquisitions, this study does not find convincing evidence that cash is used for good acquisitions.

Corporate governance and investment

Abstract: This article contributes in at least three ways to the investment‐cash flow literature. First, it finds that the corporate governance environment of a firm affects the relationship between investment and cash flow. Second, it allows for both asymmetric information and managerial discretion explanations for positive investment‐cash flow coefficients, thereby overcoming most of the ambiguities in this interpretation. Finally, by using a GMM estimator most of the problems with traditional OLS models are avoided. It is found that family‐controlled firms appear to suffer from cash constraints as evidenced by a positive and robust relationship of investment to cash flow. State‐controlled firms also exhibit a positive and significant cash flow sensitivity, which we explain by managerial discretion.

Financing Construction: Cash Flows and Cash Farming

Abstract: Cash is king, not least in the construction industry. Recent government-commissioned reports have highlighted the importance of better financial management in the construction industry. This professional text provides a considered analysis of the tools and techniques of project financial management in construction; notably it covers cash flow modelling and provides the first detailed investigation of the contentious issue of cash farming. Through use of case studies, worked examples and questions this book will appeal to practitioners and students alike.

Cash flow aggregation system and method

Abstract: A data construct represents a financial asset in a data processing system. The data construct comprises description data, a cash flow map, and process instructions. The description data further comprises creation, purpose, and transaction information data describing the financial asset. The cash flow map further comprises information on cash flows that flow into the financial asset. The process instructions include information on cash flow processing for the cash flows that flow into the financial asset.

The Incremental Information Content of Earnings and Cash Flows from Operations Affected by Their Extremity

Abstract: Previous returns studies have shown that extreme earnings and extreme cash flows from operations are less informative than moderate (i.e., less extreme) earnings and moderate cash flows. Studies also report that cash flows supplement to earnings in firm valuation by showing a higher association of cash flows with returns when earnings are extreme than when earnings are moderate. We propose that this supplementary role of cash flows is affected by cash flows extremity. Using data from the US capital markets, we find that the supplementary role of cash flows exists only when cash flows are not extreme. We also investigate the supplementary role of earnings to cash flows and search for a higher association of earnings with returns when cash flows are extreme than when cash flows are moderate. Similar to results on cash flows, our findings show that the supplementary role of earnings exists only when earnings are not extreme. Our results imply that investors and researchers should consider both earnings and cash flows extremity when assessing the information content of these variables.

The decision usefulness of reported cash flow and accrual information in a behavioural field experiment

Abstract: While recent capital market studies tend to reveal some information content in cash flows, their results may not be generalisable to other contexts such as the assessment of solvency. Mandated acco...

Patterns of financial behaviors: implications for community educators and policymakers

Abstract: Using data from the Surveys of Consumers, we explore patterns of financial behaviors (cash flow management, saving, and investing) and the characteristics and learning preferences of households exhibiting these patterns. We find a wide range in diversity of financial behaviors among U.S. households. The only variables that consistently influenced having high scores for cash flow, saving, and investing behaviors were financial knowledge and financial learning experiences — those who knew more and those who learned from family, friends, and personal experiences had higher scores. The implication is that increases in knowledge and experience can lead to improvements in financial behaviors. We argue that one way to increase knowledge is to gain additional education, although we acknowledge that education is only one mechanism for influencing behavior. We conclude that a one-size-fits-all or a onedelivery-technique-fits-all approach to financial education will be less effective than more targeted, tailored approaches.

An Empirical Analysis of the Relationship between Cash Flow and Dividend Changes in Nigeria

Abstract: The purpose of this study is to re-evaluate the incremental information content of cash flows in explaining dividend changes, given earnings. I carry out an 882 firm-year study by analysing the dividend changes-cash flow relationship on a sample of 63 quoted firms in Nigeria over a wider testing period from 1984 to 1997. Despite the fact that I used a wider testing period than previous studies and more refined cash flow measures than previous studies, I also introduced dummy variables to capture economic policy changes in the economy. The association of cash flows with dividend changes is tested using the modified Lintner-Brittain model as adopted in Charitou and Vafeas (1998) on pooled cross sectional/time series data from the full sample of observations from 1984-97. The models are estimated using the ordinary least squares (OLS) method and I do find a significant relationship between dividend changes and cash flow unlike previous studies. The empirical results reveal that the relationship between cash flows and dividend changes depend substantially on the level of growth, the capital structure choice, size of each firm and economic policy changes.

Risk and Valuation Under an Intertemporal Capital Asset Pricing Model

Abstract: We analyze the risk characteristics and the valuation of assets in an economy in which the investment opportunity set is described by the real interest rate and the maximum Sharpe ratio. It is shown that, holding constant the beta of the underlying cash flow, the beta of a security is a function of the maturity of the cash flow. For parameter values estimated from U. S. data, the security beta is always increasing with the maturity of the underlying cash flow, while the discount rates for risky cash flows can be increasing, decreasing or non-monotone functions of the maturity of the cash flow. The variation in discount rates and present value factors that is due to variation in the real interest rate and the Sharpe ratio is shown to be large for long maturity cash flows, and the component of the volatility that is due to variation in the Sharpe ratio is more important than that due to variation in the real interest rate.

Development of a company‐level dynamic cash flow forecasting model (DYCAFF)

Abstract: Current methods of predicting cash flow have a number of significant weaknesses. At the project level, previous models are simple and incorporate only some of the variables affecting cash flow. On the company level, budgeting is performed on an overall basis (i.e. no account is taken of individual contracts). This is mainly due to the fact that a considerable amount of any year's turnover is contributed by contracts that have yet to be won (or even known of) at the time of the budget. This approach, in addition to being inaccurate, precludes the role of budgeting as a tool for strategy evaluation. This paper presents a dynamic cash flow forecasting model that would assist contractors to effectively plan and manage the cash flow of individual projects and at a company level. The advances made in the model can be represented by three of its main features. First, the development of a more accurate and complex cash flow calculation mechanism. Second, the development of an information system that will help the...

The Relative Relevance of Cash Flow and Accrual Information for Solvency Assessments: A Multi‐Method Approach

Abstract: This multi-method study reports the results of two complementary experiments investigating the relevance of cash flow and accrual information. A behavioural field experiment investigated differences in the accuracy of solvency assessments between commercial lending managers using cash flow information and those using accrual information. Results indicated that commercial lending managers using cash flow information made more accurate solvency assessments than managers using accrual information. Results of an archival quantitative modeling experiment complemented these results and indicated cash flow information had incremental information content beyond accrual information. Our results confirmed the decision-usefulness of cash flow information and supported the mandate of the Statement of Cash Flows.

Equivalence of Ten Different Methods for Valuing Companies by Cash Flow Discounting

Abstract: This paper shows that ten methods on company valuation using cash flow discounting (WACC; equity cash flow; capital cash flow; adjusted present value; residual income; EVA; business's risk-adjusted equity cash flow; business's risk-adjusted free cash flow; risk-free-adjusted equity cash flow; and risk-free-adjusted free cash flow) always give the same value when identical assumptions are used. This result is logical, since all the methods analyze the same reality based upon the same assumptions; they only differ in the cash flows taken as the starting point for the valuation. We present all ten methods allowing the required return to debt being different from the cost of debt. Seven methods require an iterative process. Only APV and the business risk-adjusted cash flows methods do not require iteration.

Valuation Effects of Corporate Cash Holdings: Evidence from Germany

Abstract: Cash holdings obviously play an important role in financial management of corporations: the largest firms in the world held 1.5 trillion USD in cash and marketable securities in 1998. Finance theory however has not dealt with this subject in detail until the mid 90's. Especially concerning the valuation effects of corporate cash holding empirical studies are very rare. Harford (1999) finds that cash-rich firm engage in value destroying acquisitions. Opler et al. (1999) report that firms use excess cash in order to finance operating losses. Mikkelson/Partch (2002) analyze firms with persitent large cash reserves but do not report significant effects on performance. We contribute to this literature in two ways: first, we adapt and refine the methodology of Mikkelson/Partch (2002) and do find a significant operating underperformance of German firms that previously held excess cash over a three-year period. This can be interpreted as evidence for agency based hypotheses stating that large excessive cash holdings represent stocks of free cash flow which may be invested inefficiently by managers. Second, we study direct valuation effects of corporate cash holdings by constructing excess enterprise values of firms using an adaptation of the Berger/Ofek (1995) valuation algorithm. Our results suggest that both positive and negative deviations from the industry median cash to sales ratio have a significant impact upon excess value. While lower than median cash to sales ratios yield lower excess values - thus at least in part supporting our joint version of the trade off hypothesis of corporate cash holdings - positive deviations have a positive impact upon excess values. So in an overall perspective our results fail to support our joint version of the trade off hypothesis.

How Corporate Governance and Globalization Can Run Afoul of the Law and Good Practices in Business: The Enron's Disgraceful Affair

Abstract: The purpose of this paper is to set out the Enron's demise into the perspective of Corporate and Global Governance. To accomplish this target, the incremental cash flow model is expanded to give room for governance issues, while a functional introduction to information sets is developed, including bounded rationality, asymmetric information, opportunistic behavior, transaction costs and agency problems. Then, corporate governance is linked to globalization by means of some recent approaches that go beyond a narrow economic mindset to encompass a far-reaching dynamics. Taking advantage of such background, the Enron's story is tracked down over a span of fifteen years since its starting day to its bankruptcy filing. Leading events are explained from corporate and global governance viewpoints, while an in-depth analysis is worked out on Enron's complex game of deception and breach of contracts: the outrageous affiliated limited partnerships, the lavish pay package to its executives, the involvement with global governance through the Indian affair and the Taliban connection. It is for the incremental cash flow model to explain malfeasance with cash flows from assets, and how cash flows to creditors were actually contrived. Furthermore, to highlight how cash flows were swindled from stockholders and, finally, how Enron made wheeling and dealing with cash flows on behalf of its managers.

Patterns of Financial Behaviors : Implications for Community Educators and Policy Makers Discussion Draft - February, 2003

Abstract: Using data from the Surveys of Consumers, we explore patterns of financial behaviors (cash flow management, saving, and investing) and the characteristics and learning preferences of households exhibiting these patterns. We find a wide range in diversity of financial behaviors among U.S. households. The only variables that consistently influenced having a high score for cash flow, saving, and investing behaviors were financial knowledge and financial learning experiences – those who knew more and those who learned from family, friends, and personal experiences had higher scores. The implication is that increases in knowledge and experience can lead to improvements in financial behaviors. We argue that one way to increase knowledge is to gain additional education, although we acknowledge that education is only one mechanism for influencing behavior. We conclude that a “one size fits all” and a “one delivery technique fits all” approach to financial education will be less effective than more targeted, tailored approaches.

The New CFO Financial Leadership Manual

Abstract: Preface. Acknowledgments. About the Author. Part 1 Overview. 1 CFO's Place in the Corporation. First Days in the Position. Specific CFO Responsibilities. Overview of the Change Management Process. Differences between the Controller and CFO Positions. Relationship of the Controller to the CFO. Summary. 2 Financial Strategy. Cash. Investments. Working Capital. Inventory: Inventory Reduction Decision. Fixed Assets: Lease versus Buy Decision. Payables. Debt. Equity. Fixed Expenses: Step Costing Decision. Payroll Expenses: Temporary Labor versus Permanent Staffing Decision. Entities: Divestiture Decision. Systems: When to Use Throughput Costing. High-Volume, Low-Price Sale Decision Using Throughput Costing. Capital Budgeting Decision Using Throughput Costing. Make versus Buy Decision Using Throughput Costing. Summary. 3 Tax Strategy. Accumulated Earnings Tax. Cash Method of Accounting. Inventory Valuation. Mergers and Acquisitions. Net Operating Loss Carryforwards. Nexus. Project Costing. S Corporation. Sales and Use Taxes. Transfer Pricing. Unemployment Taxes. Summary. 4 Information Technology Strategy. Reasons for Devising an Information Technology Strategy. Developing the Information Technology Strategy. Technical Strategies. Specific Applications. Summary. Part 2 Accounting. 5 Performance Measurement Systems. Creating a Performance Measurement System. Asset Utilization Measurements. Operating Performance Measurements. Cash-Flow Measurements. Liquidity Measurements. Solvency Measurements. Return on Investment Measurements. Market Performance Measurements. Quality of Earnings Ratio. Summary. 6 Control Systems. Need for Control Systems. Types of Fraud. Key Controls. When to Eliminate Controls. Summary. 7 Audit Function. Composition of the Audit Committee. Role of the Audit Committee. Purpose of the External Auditors. Dealing with External Auditors. Impact of the Sarbanes-Oxley Act on the Audit Function. Role of the Internal Audit Function. Managing the Internal Audit Function. Summary. 8 Reports to the Securities and Exchange Commission. Overview. Securities Act of 1933. Securities Exchange Act of 1934. Regulation S-X. Regulation S-K. Regulation S-B. Regulation FD. SEC Forms. EDGAR Filing System. Summary. Part 3 Financial Analysis. 9 Cost of Capital. Components. Calculating the Cost of Debt. Calculating the Cost of Equity. Calculating the Weighted Cost of Capital. Incremental Cost of Capital. Using the Cost of Capital in Special Situations. Modifying the Cost of Capital to Enhance Shareholder Value. Strategize Cost of Capital Reductions. Summary. 10 Capital Budgeting. Hurdle Rate. Payback Period. Net Present Value. Internal Rate of Return. Problems with the Capital Budget Approval Process. Cash Flow Modeling Issues. Funding Decisions for Research and Development Projects. Capital Investment Proposal Form. Post-Completion Project Analysis. Summary. 11 Other Financial Analysis Topics. Risk Analysis. Capacity Utilization. Breakeven Analysis. Business Cycle Forecasting. Summary. Part 4 Funding. 12 Cash Management. Cash Forecasting Model. Measuring Cash Forecast Accuracy. Cash Forecasting Automation. Cash Management Controls. Cash Management Systems. Foreign Exchange with the Continuous Link Settlement System. Natural Hedging Techniques. Summary. 13 Investing Excess Funds. Investment Criteria. Investment Restrictions. Investment Options. Summary. 14 Obtaining Debt Financing. Management of Financing Issues. Bank Relations. Credit Rating Agencies. Accounts Payable Payment Delay. Accounts Receivable Collection Acceleration. Credit Cards. Direct Access Notes. Employee Trade-Offs. Factoring. Field Warehouse Financing. Floor Planning. Inventory Reduction. Lease. Line of Credit. Loans. Preferred Stock. Sale and Leaseback. Summary. 15 Obtaining Equity Financing. Types of Stock. Private Placement of Stock. Layout of the Offering Memorandum. Establishing a Valuation for the Offering Memorandum. Swapping Stock for Expenses. Swapping Stock for Cash. Stock Warrants. Stock Subscriptions. Private Investment in Public Equity. Committed Long-Term Capital Solutions. Buying Back Shares. Summary. 16 Initial Public Offering. Reasons to Go Public. Reasons Not to Go Public. Cost of an IPO. Preparing for the IPO. Finding an Underwriter. Registering for and Completing the IPO. Alternatives for Selling Securities. SCOR. Trading on an Exchange. Over-the-Counter Stocks. Restrictions on Stock in a Publicly Traded Company. Summary. 17 Taking a Company Private. Going Private Transaction. Rule 13E-3. Filling Out Schedule 13E-3. Intentional Delisting. Summary. Part 5 Management. 18 Risk Management. Risk Management Policies. Risk Management Planning. Manager of Risk Management. Risk Management Procedures. Types of Insurance Companies. Evaluating the Health of an Insurance Carrier. Catastrophe Bonds. Claims Administration. Insurance Files. Annual Risk Management Report. Key-Man Life Insurance for the CFO. Summary. 19 Outsourcing the Accounting and Finance Functions. Advantages and Disadvantages of Outsourcing. Contractual Issues. Transition Issues. Controlling Supplier Performance. Measuring Outsourced Activities. Managing Suppliers. Dropping Suppliers. Summary. 20 Operational Best Practices. Best Practices. Summary. 21 Mergers and Acquisitions. Evaluating Acquisition Targets. Complexity Analysis. Evaluate Acquisition Targets with Alliances. Valuing the Acquiree. Determining the Value of Synergies. Form of Payment for the Acquisition. Terms of the Acquisition Agreement. When to Use an Investment Banker. Accounting for the Acquisition. Purchase Method. Cost Method. Equity Method. Consolidation Method. Intercompany Transactions. Contingent Payments. Push-Down Accounting. Leveraged Buyouts. Spin-Off Transactions. Summary. 22 Electronic Commerce. Advantages of Electronic Commerce. E-Commerce Business Model. Restructuring the Organization for E-Commerce. E-Commerce Architecture. E-Commerce Security. E-Commerce Insurance. E-Commerce Legal Issues. Summary. Part 6 Other Topics. 23 Employee Compensation. Deferred Compensation. Life Insurance. Stock Appreciation Rights. Stock Options. Bonus Sliding Scale. Cut Benefit Costs with a Captive Insurance Company. Summary. 24 Bankruptcy. Applicable Bankruptcy Laws. Players in the Bankruptcy Drama. Creditor and Shareholder Payment Priorities. Bankruptcy Sequence of Events. Tax Liabilities in a Bankruptcy. Special Bankruptcy Rules. The Bankruptcy Act of 2005. Alternatives to Bankruptcy. Summary. Appendices. A New CFO Checklist. B Performance Measurement Checklist. C Due Diligence Checklist. Industry Overview. Corporate Overview. Organization and General Corporate Issues. Capitalization and Significant Subsidiaries. Employees. Revenue. Assets. Liabilities. Financial Statements. Internet. Software Development. Marketing. Sales. Research and Development. Payroll. Human Resources. Treasury. Culture. Complexity. Other. Index.

Corporate Valuation: A Guide for Managers and Investors

Abstract: PART I: BASIC CONCEPTS OF CORPORATE VALUATION 1 Why Corporate Valuation? 2 A Complete Corporate Valuation for a Simple Company Appendix 2 Comparing Bond and Stock Valuation Models with the Corporate Valuation Model PART II: INTERMEDIATE CONCEPTS OF CORPORATE VALUATION 3 Financial Statements and Free Cash Flow Appendix 3 Reconciling Free Cash Flow with the Statement of Cash Flows 4 Estimating the Value of ACME Appendix 4 Security Valuation PART III: PROJECTING FINANCIAL STATEMENTS 5 Projecting Free Cash Flows 6 Projecting Consistent Financial Statements: The Miracle of Accounting 7 Multiyear Projections and Valuation 8 Technical Issues in Projecting Financial Statements and Forecasting Financing Needs PART IV: VALUING ACTUAL COMPANIES WITH THE CORPORATE VALUATION SPREADSHEET 9 The Starting Point for Corporate Valuation: Historical Financial Statements Appendix 9 Why We Condense the Financials 10 The Condensed Financial Statements and Historical Analysis Appendix 10 Mapping the Comprehensive Statements to the Condensed Statements: Advanced Issues in Measuring Free Cash Flows 11 Estimating the Weighted Average Cost of Capital 12 Projecting Cash Flows for an Actual Company: Home Depot Appendix 12 Top-Down Analysis 13 The Valuation of an Actual Company: Home Depot Appendix 13 The Adjusted Present Value Method

Monetary Policy and Corporate Investment in France

Abstract: Using a large panel of 6946 French manufacturing firms, this paper investigates the effect of sales, of the cost of capital and of liquidity constraint variables (cash flow or cash stock) on the stock of capital from 1990 to 1999. The user cost elasticity is at the most 0.26 in absolute terms for all the firms of the sample. Three groups of firms representing around 20 per cent of the sample (firms facing a high risk of bankruptcy, firms belonging to the capital goods sector, firms making extensive use of trade credit) are more sensitive to cash flow. Risky firms are less sensitive to sales, when cash stock replaces cash flow. Simulations following shocks of interest rate (related to monetary policy shocks), provides short run contemporaneous elasticities of investment with respect to interest rate through the user cost and through debt repayments taken into account in cash flow.

Interpreting Risk Premia Across Size, Value, and Industry Portfolios

Abstract: In this paper, we model cash flow and consumption growth rates as a vector-autoregression (VAR), from which we measure the response of cash flow growth to consumption shocks As the appropriate cash flow proxy is not unambiguous, nor likely to be measured without error, we consider three alternatives for portfolio cash flows: cash dividends, dividends plus repurchases and corporate earnings We find that the long-run exposure of cash flows to aggregate consumption risk can justify a significant degree of the observed variation in risk premia across size, book-to-market, and industry sorted portfolios Also, our economic model highlights the reasons for the failure of the market beta to justify the cross-section of risk premia Most importantly, our results indicate that measured diferences in the long-run exposures of cash flows to aggregate economic fluctuations as captured by aggregate consumption movements contain very valuable information regarding diferences in risk premia In all, our results indicate that the size, book-to-market and industry spreads are not puzzling from the perspective of economic models

Equilibrium Asset Prices under Imperfect Corporate Control

Abstract: Shareholders have imperfect control over the decisions of the management of a firm. We integrate a widely accepted version of the separation of owership and control — Jensen’s (1986) free cash flow theory — into a dynamic equilibrium model and study the effect of imperfect corporate control on asset prices and investment. We assume that firms are run by empire-building managers who prefer to invest all free cash flow rather than distributing it to shareholders. Shareholders are aware of this problem but it is costly for them to intervene to increase earnings payouts. Our corporate finance approach suggests that the aggregate free cash flow of the corporate sector is an important state variable in explaining asset prices and investment. We show that the business cycle variation in free cash flow helps to explain the cyclical behavior of interest rates and the yield curve. The stochastic variation in free cashflow sheds light on risk premia on corporate bonds and out-of-the-money put options. We also show that the financial friction causes cash-flow shocks to affect investment, and causes otherwise i.i.d. shocks to be transmitted from period to period. Unlike the existing macroeconomics literature on financial frictions, the shocks propagate through large firms and during booms.