Showing papers on "Cash flow forecasting published in 2004"

Corporate Financial Policy and the Value of Cash

Abstract: We examine the cross-sectional variation in the marginal value of corporate cash holdings arising from differences in corporate financial policy. We begin by providing semi-quantitative predictions for the value of an extra dollar of cash depending upon whether that dollar will most likely go to i) increasing distributions to equity, ii) reducing the amount of cash that needs to be raised in the capital markets, or iii) servicing debt or other liabilities. We then relate firm financial structure characteristics to the likelihood of firms engaging in these actions, and derive a set of intuitive hypotheses to test empirically. We generate estimates of the marginal value of cash by examining the variation in excess stock returns over the fiscal year and find results that are both qualitatively and quantitatively consistent with all hypotheses tested. In particular, we find that the marginal value of cash declines with larger cash holdings, higher leverage, better access to capital markets, and as firms choose to distribute cash via dividends rather than repurchases.

Liquidity ‐ profitability tradeoff: An empirical investigation in an emerging market

Abstract: This study empirically examines the relation between profitability and liquidity, as measured by current ratio and cash gap (cash conversion cycle) on a sample of joint stock companies in Saudi Arabia. Using correlation and regression analysis the study found significant negative relation between the firm’s profitability and its liquidity level, as measured by current ratio. This relationship is more evident in firms with high current ratios and longer cash conversion cycles. At the industry level, however, the study found that the cash conversion cycle or the cash gap is of more importance as a measure of liquidity than current ratio that affects profitability. The size variable is also found to have significant effect on profitability at the industry level. Finally, the results are stable over the period under study.

Cash and Corporate Control

Abstract: The takeover market is often suggested as appropriate for containing the agency problems of excessive corporate cash holdings. However, recent studies report contradictory evidence. I focus on the takeover-deterrence effects of corporate liquidity and suggest the proxy contest as an effective alternative control mechanism. I find that proxy fight targets hold 23% more cash than comparable firms, and that the probability of a contest is significantly increasing in excess cash holdings. Proxy fight announcement return also is positively related to excess cash. Following a contest, executive turnover and special cash distributions to shareholders increase, while cash holdings significantly decline. QUITE OFTEN, THE TAKEOVER MARKET is suggested as ideal for containing the agency problems of corporate free cash flow. Contrary to this, however, Harford (1999) and Pinkowitz (2002) both find that the likelihood of a firm becoming a takeover target is significantly negatively related to the holding of excess cash. This result could be explained in terms of the takeover-deterrence effects of corporate liquidity. Excess cash enhances the ability of a hostile target to defend itself against an unwanted bid. Such defenses include repurchasing stock, acquiring a competitor of the bidder and filing private antitrust litigation, or turning around to acquire the suitor itself (Bagwell (1991), Stulz (1988), and Dann and DeAngelo (1988)). In addition, excess cash increases the bidder’s uncertainty about the value of the target since it can be used to engage in bidder-specific negative net present value activities. Thus, holding excess cash may serve as a deterrent to would-be bidders. This paper focuses on the takeover-deterrence effects of excess cash and suggests the proxy contest as an effective control mechanism for addressing the agency problems of excessive corporate liquidity. As in a hostile takeover situation, management will employ all available defenses in a proxy contest. Nevertheless, I propose that dissident shareholders conducting a proxy fight independently of a takeover bid are not encumbered by the considerations that may deter a hostile bidder.

Empirical Studies on Cash Payments

Abstract: Jeanine Kippers (1973) obtained her master´s degree in econometrics from the Erasmus University Rotterdam in 1997. In the same year she was employed by De Nederlandsche Bank. She participated in the preparations of the cash changeover from guilder to euro in 2002, and contributed to the development of a European cash distribution system and the restructuring of the national distribution system. During her employment at the central bank she started her research on currency use, which resulted in several papers that have been published or are currently under review. In January 2004 she joined the Pensionand Insurance Supervisory authority, as a policy advisor in the (international) field of insurance supervision.

Assessing Alternative Proxies for the Expected Risk Premium

Abstract: Managers, investors and researchers have a compelling interest in identifying a reliable empirical proxy for firm-specific cost of equity capital (r). In theory, deducing r is possible if the market's future cash flow forecast and current stock price are observable. Practically, deducing r is dependent on the ability to estimate the market's forecasted terminal value. We evaluate five methods of deducing firm-specific r (labeled rDIVPREM, rGLSPREM, rGORPREM, rOJNPREM, and rPEGPREM) that deal with this conundrum differently. The extent to which the estimates are associated with firm risk in a stable and meaningful manner is the basis for our assessment. We find that the rDIVPREM and rPEGPREM estimates are consistently and predictably related to risk, while the alternatives are not. Based on these results, we conclude that rDIVPREM and rPEGPREM dominate the alternatives.

Corporate Data and Future Cash Flows

Abstract: This article examines the ability of current accounting data to explain future cash flows for UK firms, as disclosed under FRS1(1991). Rather than examining price data — from which cash flow implications have to be inferred — we follow the more direct approach used in several recent US studies, in which actual future cash flow data are examined. Specifically, our methodology is a development of the OLS regression framework employed by Barth et al. (2001). We provide a replication of their main OLS analysis, and then extend this to deal with fixed effects and time trends in the levels of cash flow data. Our study finds that the disaggregation of earnings into cash flows and accruals, generates superior explanatory power with regard to future cash flows.

Principles of Cash Flow Valuation: An Integrated Market-Based Approach

Abstract: Basic concepts in market-based cash flow valuation Time value of money (TVM) and introduction to cost of capital Basic review of financial statements and accounting concepts Constructing integrated pro-forma financial statements Derivation of the free cash flows Using the WACC in theory and in practice Estimating the WACC for non traded firms Beyond the planning period: calculating the terminal value Theory for cost of capital revisited How are Cash Flows Valued in Reality?

Management accounting curricula: striking a balance between the views of educators and practitioners

Abstract: Management accounting education has been subject of considerable debate since the 1970s, particularly in terms of what topics should be taught. The research reported here set out to ascertain the management accounting topics/techniques and the skills/characteristics that are considered important for a graduate who intends to pursue careers in management accounting. Based on a survey conducted on educators and practitioners, the results indicate that educators viewed behavioural implications, activity-based costing (ABC), performance evaluation and product costing as the top four important topics. In contrast, practitioners' top four important topics were cash flow management, operational budgeting, variance analysis and performance evaluation. Overall, traditional techniques, as compared to contemporary techniques, tend to be more widely used by firms. As regards skills and characteristics, practitioners and educators placed high importance on thinking, problem solving, listening and quantitative skills.

Agency problems and capital expenditure announcements

Abstract: This article examines the market valuation of announcements of new capital expenditure. Prior research suggests that the firm's growth opportunities and cash flow position condition the market response. This study jointly examines the role of growth and cash flow, and the interaction between them. Using a new data set of Australian firms that avoids problems associated with expectations models, the results are remarkably strong and support a positive association between growth opportunities and the market valuation, in addition to supporting the role of free cash flow. The findings have implications for the relationship between general investment information and stock prices.

Incentives vs. Control: An Analysis of U.S. Dual-Class Companies

Abstract: Dual-class common stock allows for the separation of voting rights and cash flow rights across the different classes of equity. We construct a large sample of dual-class firms in the United States and analyze the relationships of insider's cash flow rights and voting rights with firm value, performance, and investment behavior. We find that relationship of firm value to cash flow rights is positive and concave and the relationship to voting rights is negative and convex. Identical quadratic relationships are found for the respective ownership variables with sales growth, capital expenditures, and the combination of R&D and advertising. Our evidence is consistent with an entrenchment effect of voting control that leads managers to underinvest and an incentive effect of cash flow ownership that induces managers to pursue more aggressive strategies.

Corporate Cash Holdings and Agency Conflicts

Abstract: The paper explores the institutional context as a driving force of cash holdings, focusing on the role of ownership concentration, voting rights, growth opportunities, and information asymmetries. For this purpose, we use a sample of 128 Swiss firms for the period 1990-2000 as Swiss firms are characterized by high cash levels and concentrated ownership. Also, minority shareholders are poorly protected in Switzerland. Our results show that both the tradeoff and pecking order theories are at work. More importantly, we find that the institutional context substantially affects cash holding behavior as firms with less concentrated ownership retain more cash. Finally, firms with different voting right shares adjust more slowly than firms with simple and unique voting right structure.

The Impact of Ownership Structure on Debt Financing of Japanese Firms With the Agency Cost of Free Cash Flow

Abstract: This paper, using 833 observations of listed Japanese firms between the years 1992 to 2000, explore the implications of the free cash flow hypothesis concerning the disciplinary role of ownership structure in corporate capital structure policy. The results show (1) the sensitivity of ownership structure to leverage depends on growth opportunities and free cash flow. (2) Keiretsu classification affects relations between ownership structure and leverage. Overall, the results generally support the free cash flow hypothesis.

Is Cash Negative Debt

Abstract: We model a firm’s decision to allocate excess cash flows to cash holdings versus debt reductions in the presence of financing constraints. Our model shows that holding cash allows firms to hedge against the eect of future cash flow shortfalls on constrained investment, but that reducing current leverage is a more eective way to increase investment in future states of nature in which cash flows are high. This trade-o in the cash‐debt decision generates the prediction that constrained firms will prefer to allocate current cash flows into cash holdings if their hedging needs are high (that is, if the correlation between cash flows and the availability of new investment opportunities is low), but that the same constrained firms will use cash flows to reduce debt if their hedging needs are low. The empirical examination of (joint) debt and cash policies of a large sample of firms over the 1971-2001 reveals evidence that is consistent with our theory. In particular, we find that financially constrained firms with high hedging needs show a strong propensity to save cash out of excess cash flows, leaving their debt positions largely unchanged. Constrained firms with low hedging needs, in contrast, behave much alike financially unconstrained firms in that they strongly favor the use of excess cash flows towards debt redemption (they save debt capacity) and only at the margin allocate cash flow surpluses into their cash accounts. In general, our results show that cash is not always equal to negative debt: cash savings and debt repayments play a distinct role in the optimization of investment under financial constraints.

Statement of Cash Flows: Time for Change!

Abstract: The statement of cash flows is one of the three basic financial statements required under generally accepted accounting principles (GAAP). Recent financial reporting scandals have shown that this basic financial statement is in need of reform. The presentation of operating cash flow using the indirect method is confusing to many readers, including financial analysts. The terminology used in the statement is unclear and unhelpful. The misclassification of specific cash flows in the operating, financing, or investing sections can result in overstatement of operating cash flow. The direct method for reporting cash flow from operations is recommended, together with an improved reconciliation of operating cash flow to net income. Moreover, companies need better guidance on classifying individual cash flows; the statement itself needs improved descriptions and straightforward terminology.

A continuous-time agency model of optimal contracting and capital structure

Abstract: We explore the financing of a project when the agent can privately benefit by taking actions that reduce cash flows, and investors' only means of forcing repayment is the threat of termination. We introduce techniques to solve for the optimal contract (given the incentive constraints) in continuous time, and study the properties of the capital structure that implements the contract. The implementation involves a credit line, long-term debt and equity, as in a discrete-time model of DeMarzo and Fishman (2003). The continuous-time setting allows for a much cleaner characterization of the contract in terms of a differential equation, which we can then use to derive a number of new results. The optimal length of the credit line is determined by trade-off between the flexibility to run the project when it temporarily generates losses, and cost of delaying dividends until the credit line is paid off. Surprisingly, we find that the firm's total debt capacity is relatively insensitive to the project's volatility or the cost of liquidation. We derive explicitly how the optimal mix of long-term debt and credit varies with project characteristics. For example, the amount of long-term debt decreases with the project's volatility, the cost of liquidation, and the inefficiency of diversion. In some cases, the optimal long-term debt is negative; i.e., the firm holds a compensating cash balance while simultaneously borrowing (at a higher rate) through the credit line. We consider the implications of our model for security prices, and show that in many settings, the usual agency problems between debt and equity holders (asset substitution, strategic default) do not arise, and that optimal leverage declines with the firm's past profitability.

The benefits of holding cash: a real options approach

Abstract: Companies need to decide on the optimal amounts of cash to hold. Although this problem has long been acknowledged as a major issue for corporations, new advances in the finance literature have not been fully implemented in this area. We propose here what we believe is the first modelization of a real options approach to determine the financial benefits of holding cash. We measure the benefits of holding cash if raising new capital takes time, is costly and if the firm faces the risk of having to issue underpriced securities to obtain that capital. We show that the methodology proposed leads to non‐intuitive results that warrant further research in the field and should attract academics’ as well practitioners’ attention.

Corporate Governance Mechanisms and Corporate Cash Holdings

Abstract: In this paper, we examine whether corporate governance mechanisms play some role in determining the cash balances held by Singapore corporations. We document that board size, insider dominance of the board, and non-management blockholder ownership are important determinants of cash holdings. We further find that the incremental value of holding excess cash is negative even after controlling for board size or insider dominance. These findings are consistent with the agency view of cash holdings. Managers in firms with poor corporate governance have more discretion over corporate cash policies, and the value reduction imposed on these firms may reflect minority shareholders' recognition of the possibility of managerial entrenchment.

Cash management behavior of firms and its structural change in an emerging money market

Abstract: Driven by fast evolution in the money market during the past two decades, financial and technological innovations, increasing competition, and internationalizing of businesses, cash and treasury management has become an increasingly important function in most firms. It is reasonable to expect that the role of financial transactions in the cash management process in adding to firm value has increased its importance and changed the cash management behavior of firms. The main purpose of this study is to investigate this potential behavioral change in cash management by examining the cash management practices behind the models explaining the cash management behavior and to test the stability of some of these models. It is hypothesized that the environmental changes have been remarkable enough to change the cash management behavior, which can be seen as a structural change in the cash management function. The factors assumed to explain this phenomenon may concern organizational and technological arrangements in cash management, likewise professional skills in the area of financial transactions and incentives for these especially created by emerging money markets. The examination was conducted using the survey method to map out the best cash management practices followed by Finnish listed manufacturing and service companies and by testing the stability of both static and dynamic models explaining cash management behavior. The empirical part of the study is based on three questionnaires in three separate years, namely 1988, 1994, and 2000, and the empirical estimation of the selected cash management models using financial statement data for the years 1972 to 2001. The study concludes that during the research period firms have achieved a significant technological progress (improving systems and methods) and significant behavioral changes (increasing professionalism) concerning cash management practices, referring to opportunities for more effective cash management operations. The stability tests of cash management models indicated that a structural change in cash management behavior occurred after the deregulation years in the money market. These results were consistent with the surveys referring the development in the efficiency of the firms' cash management.

The Impact of Stock Purchase Plan Participation on Workers' Individual Cash Compensation

Abstract: This study investigates if stock purchase plan participation within an organization leads to (1) an increase in workers' individual cash compensation through enhanced individual job performance and (2) an increase in individual cash compensation beyond the cash compensation increase obtained through enhanced individual job performance. The sample consists of 5385 worker-year observations from a major financial institution. Results are consistent with the study's two hypotheses.

Open market share reacquisitions, surplus cash, and agency problems

Abstract: This paper investigates the role that excess cash plays in explaining actual open market share reacquisitions and examines the impact of agency problems on the payout decision. Using data from the U.K., where disclosure regulations make it possible to directly measure the volume and value of shares reacquired, we find that repurchase activity clusters in cash generative industries where investment opportunities are scarce. Holding investment opportunities constant at the firm level, we find that abnormally high cash flows from operating and (to a lesser extent) investing activities drive both the probability of a repurchase and the amount spent reacquiring shares. Comparing a subset of repurchases that are unambiguously driven by the desire to distribute surplus cash with a cash-matched sample of nonrepurchasing firms, we find that repurchasers are characterized by lower managerial entrenchment. Repurchasers also report superior improvements in postrepurchase operating performance and are less likely either to fail or be targeted in corporate control contests during the two-year period following the payout decision. Our results support the view that managers use share reacquisitions as flexible tool for distributing transitory cash surpluses, but only in the absence of serious agency problems between inside and outside shareholders.

Top 9 (Unnecessary and Avoidable) Mistakes in Cash Flow Valuation

Abstract: In cash flow valuation (CFV), there are two main categories of mistakes: derivation of the appropriate cash flows and estimation of the cost of capital. A simple-minded view of the world would suggest that with near perfect capital markets, the presence of arbitrage would severely punish wrong valuations and eradicate such mistakes in the derivations of cash flows and estimations of the cost of capital. Nonetheless, to the dismay of academics, such mistakes continue to exist and thrive. It is not clear why such mistakes persist in practice. In this paper we present our list of the top nine mistakes in cash flow valuation. In the age of the computer these mistakes are both unnecessary and avoidable. In the usual triumph of hope over experience, we are attempting to persuade analysts that they would benefit from paying attention to these mistakes. Ultimately, the (un)importance of the mistakes is an empirical question and depends on the considered judgment of practitioners.

Ownership-based Incentives, Internal Corporate Risk and Firm Performance

Abstract: This study focuses on the incentives and risk-taking behavior of large shareholders in Thailand before and after the 1997 financial crisis. The results show that there is a negative association between risk and firm performance. However, the effect ore cash flow re members of top management. Furthermore, there is weak evidence that a move to more transparent direct control structure benefits the firms. Overall, the results indicate that ownership-based incentives are an effective means of aligning the interests between controlling shareholders and minority shareholders particularly in the post-crisis period.

Are Brazilian Firms Savings Sensitive To Cash Windfalls

Abstract: One of the most studied topics in the corporate finance literature is the effect of financial constraints on firms' investments decisions. Trying to explain this issue, Almeida, Campello andWeisbach (2003) modeled the relationship between the financial constraints faced by firms and their demand for liquidity. They show that if one firm is financial constrained we must expect positive cash _ow sensitivity from cash windfalls, while for unconstrained firms this relation does not hold. The aim of this article is to check this proposition using annual data of 336 non-financial Brazilian public firms, from 1993 to 2002. Our results show that financial constrained Brazilian firms presented a positive relationship between cash _ow increases and variations of cash holdings. We also suggest that credit constraints in Brazil are directly related to the size of firms.

Cash flow forecasting in construction project

Abstract: This research introduces the development of a project-level cash flow forecasting model in construction stage based on the plamed earned value and the cost from a general contractors view on a jobsite. Most previous models have been developed to assist contractors in their pre-tendering or planning stage cash flow forecasts. The critical key to cash flow forecasting at the project level is how to build a cash-out model. The basic concept is to use moving weights of cost categories in a budget over project duration. The cost categories are classified to compile resources with almost the same time lags that are based on contracting payment condit ions and credit times given by suppliers or venders. For cash-in, net planned monthly-earned values are simply transferred to the ca sh-in forecast, to be applied there with billing time and retention money. Validation of the model involves applying data from on-goi ng4 projects in progress for 12 months. Based on the results of the comparative analyses through the simulation of the proposed mod el and the existing models, the proposed model is more accurate, flexible and simpler than traditional models to the employee of construction jobsite who is not oriented financial knowledge.