Showing papers on "Cash flow forecasting published in 2005"

Corporate Governance and the Value of Cash Holdings

Abstract: In this paper, we investigate how corporate governance impacts firm value by examining both the value and the use of cash holdings in poorly and well governed firms. Cash represents a large and growing fraction of corporate assets and generally is at the discretion of management. We use several measures of corporate governance and show that governance has a substantial impact on firm value through its impact on cash: $1.00 of cash in a poorly governed firm is valued by the market at only $0.42 to $0.88, depending on the measure of governance. Good governance approximately doubles this value of cash. Furthermore, governance has a significant impact on how firms use cash. We show that firms with poor corporate governance dissipate cash quickly and in ways that significantly reduce operating performance. This negative impact of large cash holdings on future operating performance is cancelled out if the firm is well governed. All of our results hold after controlling for the level of acquisitions undertaken by cash rich firms, indicating that acquisitions are not solely responsible for the value destruction in poorly governed, cash rich firms. The findings presented in this paper provide direct evidence of how governance can improve or destroy firm value and insight into the importance of governance in determining corporate cash policy.

Customer Satisfaction, Cash Flow, and Shareholder Value

Abstract: In this article, the authors strengthen the chain of effects that link customer satisfaction to shareholder value by establishing the link between satisfaction and two characteristics of future cash flows that determine the value of the firm to shareholders: growth and stability. Using longitudinal American Customer Satisfaction Index and COMPUSTAT data and hierarchical Bayesian estimation, the authors find that satisfaction creates shareholder value by increasing future cash flow growth and reducing its variability. They test the stability of findings across several firm and industry characteristics, and they assess the robustness of the results using multimeasure and multimethod estimation.

Retraction: Capital Market Pressure, Disclosure Frequency-Induced Earnings/Cash Flow Conflict, and Managerial Myopia

Abstract: We examine the effects of increased capital market pressure and disclosure frequency‐induced earnings/cash flow conflict on myopic behavior. In our experiments, experienced financial managers choose between projects where a conflict exists between near‐term earnings and total cash flow. Managers more often choose projects that they believe will maximize short‐term earnings (and price) as opposed to total cash flows in response to increased capital market pressure resulting from a pending stock issuance, holding constant agency frictions and other stock market pressures. When faced with increased capital market pressure, changes in disclosure frequency cause managers to behave more or less myopically depending on the impact of the change on the pattern of earnings and the resulting earnings/cash flow conflict. Our study provides insights into managers' beliefs about stock market pressures, mandatory reporting, and the availability of alternative communications channels, and contributes to literature on man...

Financial Development and the Cash Flow Sensitivity of Cash

Abstract: Prior research has posited that market imperfections and the lack of institutions which protect investor interests create a divergence between the cost of internal and external funds, thereby constraining firms' ability to fund investment projects through external financing. One consequence of financial constraints is that it forces firms to manage their cash flows to finance potentially profitable projects. A related stream of research documents that financial constraints due to costly external financing are more pronounced in underdeveloped financial markets. In this paper we examine the influence of financial development on the demand for liquidity by focusing on how financial development affects the sensitivity of firms' cash holdings to their cash flows. Using firm-level data for 35 countries covering about 12,782 firms for the years 1994-2002, we find the sensitivity of cash holdings to cash flows decreases with financial development. We also consider additional implications of firms' cash flow sensitivity of cash with respect to firm size and business cycles. Overall, we provide new cross-country evidence on the role of financial development on financial constraints.

Corporate Finance Fundamentals

Abstract: Table Of Contents: Part 1. Overview of Corporate Finance Chapter 1. Introduction to Corporate Finance Chapter 2. Financial Statements, Taxes, and Cash Flow Part 2. Financial Statements and Long-Term Financial Planning Chapter 3. Working with Financial Statements Chapter 4. Long-Term Financial Palnning and Growth Part 3. Valuation of Future Cash Flow Chapter 5. Introduction to Valuation: The Time Value of Money Chapter 6. Discounted Cash Flow Valuation Chapter 7. Interest Rates and Bond Valuation Chapter 8. Stock Valuation Part 4. Capital Budgeting Chapter 9. Net Present Value and Other Investment Criteria Chapter 10. Making Capital Investment Devisions Chapter 11. Project Analysis and Evaluation Part 5. Risk and Return Chapter 12. Some Lessons From Capital Marketing History Chapter 13. Return, Risk, and The Security Market Line Chapter 14. Options and Corporate Finance Part 6. Cost of Capital and Long-Term Financial Policy Chapter 15. Cost of Capital Chapter 16. Raising Capital Chapter 17. Financial Leverage and Capital Structure Policy Chapter 18. Dividends and Dividend Policy Part 7. Short-Term Financial Planning and Management Chapter 19. Short-Term Finance and Planning Chapter 20. Cash and Inventory Management Chapter 21. Credit and Inventory Management Part 8. Topics in Corporate Finance Chapter 22. International Corporate Finance Chapter 23. Risk Management: An Introduction to Financial Engineering Chapter 24. Option Valuation Chapter 25. Mergers and Acquistions Chapter 26. Leasing

Ultimate Corporate Ownership Structures and Capital Structures: Evidence from East Asian Economies

Abstract: This paper studies the relationship between corporate leverage and the ultimate corporate ownership structure, particularly the separation of cash flow rights and control rights. We empirically disentangle the three potential effects of the divergence of control rights from cash flow rights on corporate leverage, i.e. the non-dilution entrenchment effect, the signalling effect of debt and the reduce-debt-for-tunnelling effect. Our evidence from the East Asian corporations mainly supports the notion that controlling shareholders with relatively small ownership share tend to increase leverage out of the motive of raising external finance without diluting their shareholding dominance. The separation of cash flow rights and control rights contributes to the risk-taking tendency of the large controlling shareholders in capital structure choice. We argue that the risky capital structure choice serves as one potential channel through which weak corporate governance contributes to the severity of corporate value losses during the Asian financial crisis.

Cash Flow Sensitivity of Investment

Abstract: Investment cash flow sensitivity is associated with both undervestment when cash flows are low and overinvestment when cash flows are high. The accessibility of external capital is positively correlated with cash flows, intensifying investment cash flow sensitivity. Managers actively counteract the variations in internal and external liquidity by accumulating working capital when liquidity is high and draining it when liquidity is low. These results imply that cash flow sensitive firms face financial constraints, which are binding in low cash flow years. While financial constraints have an economically significant impact on investment timing, cash flow sensitive firms alleviate their effects and, actually, overinvest, on aggregate.

Cash Flow Forecasting Model for General Contractors Using Moving Weights of Cost Categories

Abstract: This research introduces the development of a project-level cash flow forecasting model from a general contractor’s viewpoint. While most previous models have been proposed to assist contractors in forecasting cash flow in the early stage of pretendering or the planning phase, this paper aims to provide a tool that can be applicable during the construction phase based on the planned earned value and the actual incurred cost on a jobsite level. The critical key to cash flow forecasting at this level lies in how to build a realistic cash-out model. Toward the end, this paper adopts moving weights of cost categories in a budget that are variable depending on the progress of construction works. In addition, it addresses time lags in accordance with the contractual payment conditions and credit times given by suppliers or vendors. As for the cash-in model, net planned monthly earned values are simply transferred to the cash-in forecast with a consideration of billing time and retention money. Validation of the...

Why Do Managers Voluntarily Issue Cash Flow Forecasts

Abstract: We study a relatively recent change in voluntary disclosure practices by management, namely the issuance of cash flow forecasts. We predict and find that management issues cash flow forecasts to signal good news in cash flow, to meet investor demand for cash flow information, and to pre-commit to a certain composition of earnings in terms of cash flow versus accruals, thus reducing the degree of freedom in earnings management. Our results also suggest that management discloses good news in cash flow to mitigate the negative impact of bad news in earnings, to lend credibility to good news in earnings and to signal economic viability for young firms. Our finding that management cash flow forecasts primarily convey good news is in contrast to the generally negative nature of management earnings guidance and suggests that different incentives drive firm disclosure of different financial information.

Finance-Based Scheduling: Tool to Maximize Project Profit Using Improved Genetic Algorithms

Abstract: Contractor's ability to procure cash to carry out construction operations represents a crucial factor to run profitable business. Bank overdrafts have always been the major source to finance construction projects. However, it is not uncommon that bankers set a limit on the credit allocated to an established overdraft. Bankers' interest rates and consequently contractors' financing costs are basically determined based on the allocated credit limits. Furthermore, project indirect costs are directly proportional to the project duration which is affected by the allocated credit limit. Thus, the credit limit affects project financing costs and indirect costs which in turn affect project profit. However, finance-based scheduling produces financially executable schedules at specified credit limits while maintaining the demand of time minimization. Thus, finance-based scheduling provides a tool to control the credit requirements. This control enables contractors to negotiate lower interest rates which reduce financing costs. Thus, finance-based scheduling enables contractors to reduce project indirect costs and financing costs. This paper utilizes genetic algorithm's technique to devise finance-based schedules that maximize project profit through minimizing financing costs and indirect costs.

Is Investment-Cash Flow Sensitivity Caused by the Agency Costs or Asymmetric Information? Evidence from the UK

Abstract: We investigate the investment-cash flow sensitivity of a large sample of the UK listed firms and confirm that investment is strongly cash flow-sensitive. Is this suboptimal investment policy the result of agency problems when managers with high discretion overinvest, or of asymmetric information when managers owning equity are underinvesting if the market (erroneously) demands too high a risk premium? We find that the observed cash flow sensitivity results mainly from the agency costs of free cash flow. The magnitude of the relationship depends on insider ownership in a non-monotonic way. Furthermore, we obtain that outside blockholders, such as financial institutions, the government, and industrial firms (only at high control levels), reduce the cash flow sensitivity of investment via effective monitoring. Finally, financial institutions appear to play a role in mitigating informational asymmetries between firms and capital markets. We corroborate our findings by performing additional tests based on the stochastic efficient frontier approach and power indices.

Corporate Investment and Cash Flow Sensitivity: What Drives the Relationship?

Abstract: The excess sensitivity of investment to cash flow has been demonstrated in numerous studies Recent research has identified differences in the degree of sensitivity across countries, which it ascribes to the nature of the lender-borrower relationship in the financial systems of those countries In this paper we offer new methods and results to determine whether differences are associated with structural explanations such as the nature of the financial system and industrial composition, or due to other firm-specific determinants such as size or creditworthiness Unlike previous research we are able to systematically control for competing explanations in our data from more than one country and thereby isolate what drives the relationship We find that creditworthiness is the main driving force of cash flow sensitivity

Equilibrium Investment and Asset Prices under Imperfect Corporate Control

Abstract: We integrate a widely accepted version of the separation of ownership 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 Aggregate free cash flow of the corporate sector is an important state variable in explaining asset prices, investment, and the cyclical behavior of interest rates and the yield curve The financial friction causes cash-flow shocks to affect investment, and causes otherwise iid shocks to be transmitted from period to period The shocks propagate through large firms and during booms

Cash Flow, Consumption Risk and Cross Section of Stock Returns

Abstract: This paper directly links the risk premium on an asset to two characteristics of its underlying cash flow: cash flow covariance with aggregate consumption; and cash flow duration, which measures the temporal pattern of the cash flow. Their impact on the cross-sectional variation of risk premia can be largely captured by a two-factor cash flow model. While cash flow covariance is of first-order importance in explaining the cross-sectional variation of risk premia, cash flow duration still provides additional explanatory power through a second-order interaction term. Cash flow duration is particularly important in explaining the value premium given as value and growth stocks have significantly different durations. Empirically, I measure both cash flow characteristics using only consumption and accounting data. I show that the two-factor cash flow model is able to explain 82% of the cross-sectional variation in returns on size or book-to-market sorted stock portfolios.

A Reexamination of the Persistence of Accruals and Cash Flows

Abstract: We reexamine prior studies' conclusion that accruals are less persistent than cash, focusing on two aspects of persistence that are crucial to determining its properties. The first (time specificity) refers to the fact that persistence describes how current-period shocks to income translate into next-period income. Traditional measures of accruals are, however, functions of current- and non-current-period transactions. We show that the inclusion of non-current-period transactions leads to a downward (upward) bias on the persistence of accruals (cash flows). We develop alternative measures of accruals and cash flows that are not misaligned and show that the differential persistence of cash flows over accruals is more than 70% smaller using these measures. The second aspect of persistence is firm-specificity. Specifically, we evaluate persistence using firm-specific estimations and find that more than 85% of firms show no evidence that accruals are less persistent than cash flows.

Corporate Governance, Cash Holdings, and Firm Value: Evidence from Japan

Abstract: This paper presents evidence on cash holdings for Japanese firms listed on the Tokyo Stock Exchange, focusing on the impact of corporate governance factors in cash holdings and the implication of cash holdings to firm value. We find that insider ownership and bank relations of firms play a significant role in determining cash holdings. Our results indicate that foreign stockholders select profitable firms to invest, and these firms have higher levels of cash. We document evidence that cash holdings lead to agency problems and impact firm value negatively, and governance characteristics affect the negative relation between cash holdings and firm value.

R&D investment and internal finance: the cash flow effect

Abstract: This paper investigates the cash flow effect on R&D investments for firms in Denmark. Evidence is found that internal funds are important in explaining R&D investments, indicating that R&D investment decisions are affected by credit market imperfections. Cash flow sensitivities are larger both for smaller firms and for firms with low debt relative to assets. Furthermore, this effect is also present after controlling for cash flow’s potential role as a predictor of future profitability.

Does Acquirer Cash Level Predict Post-Acquisition Returns?

Abstract: Acquirers with high cash balances on the announcement date often suffer negative post-acquisition returns. High acquirer cash also predicts negative post-acquisition return on net operating assets, suggesting that the market does not fully incorporate the "bad news" associated with a high cash balance into the acquirer's stock price on announcement, but does respond to poor operating performance in the post-acquisition period. An implementable trading strategy combining these findings with prior research yields average annual abnormal returns of 22%. Overall, these findings suggest investors' limited attention can affect prices, consistent with the analysis in Hirshleifer and Teoh [2003].

Assessing the Accuracy of Cash Flow Models: The Significance of Payment Conditions

Abstract: Cash flow forecasting methods have evolved to allow detailed predictions for individual projects. These methods, principally the cost-schedule integration (CSI) technique, make extensive use of project estimate and schedule data. An implicit assumption of these methods has been that accuracy is largely a function of the quality of data available to the model. To the writers' knowledge, there has been no assessment of the ability of project specific cash-flow models to accurately predict cash flows given accurate input data. This paper makes two contributions. First, two complementary methods are presented—pattern matching logic and factorial analysis—that provide an ability to assess the accuracy of cash flow models. Second, through demonstration of these methods using data from two projects, a critique is made of the ability of existing CSI models to accurately predict cash flows. The paper concludes by recommending extensions of CSI models to include more detailed payment conditions, including differential payment lags, components for materials and labor, and payment frequency. A further conclusion is the call for more research to better understand the balance between managers' need for information and the ability of predictive models to provide that information.

CEO Incentives, Cash Flow, and Investment

Abstract: We estimate the impact of chief executive officer (CEO) incentives on the sensitivity of investment to cash flow during a period of strong economic growth. Our measure of the alignment of managers' and shareholders' interests, pay-performance sensitivity (PPS), incorporates both stock and stock option holdings. Contrary to prior studies, we find that the dominant effect of increasing alignment is to reduce the overinvestment of free cash flow. We find no evidence that incentives exacerbate the severity of financial constraints. We find some evidence that PPS helps reduce the underinvestment of cash flow due to managerial shirking.

Exposure-Based Cash-Flow-at-Risk: An Alternative to VaR for Industrial Companies

Abstract: in Undetermined Cash-Flow-at-Risk (CFaR) is the cash flow equivalent of Value-at-Risk (VaR), a measure widely used as the basis for risk management in financial institutions. Whereas VaR-based systems specify the maximum amount of total value a firm is expected to lose under most foreseeable conditions (for example, with a 99% confidence level), CFaR-based systems determine the maximum shortfall of cash the firm is willing to tolerate. CFaR is gaining in popularity among industrial companies for much the same reasons VaR has succeeded with financial firms: it sums up all the company's risk exposures in a single number that can be used to guide corporate risk management decisions. The authors describe a six-step process for calculating a measure they call “exposure-based CFaR” and then demonstrate its application to Norsk Hydro, the Norwegian industrial conglomerate. Exposure-based CFaR involves the estimation of a set of exposure coefficients that provide information about how various macroeconomic and market variables are expected to affect the company's cash flow, while also accounting for interdependencies among such effects. The resulting model enables management to estimate the variability in corporate cash flow as a function of various risks, and to predict how a hedging contract or a change in financial structure will alter the company's risk profile. (Less)

Dealing with Cash, Cross Holdings and Other Non-Operating Assets: Approaches and Implications

Abstract: Most businesses hold cash, often in the form of low-risk or riskless investments that can be converted into cash at short notice. The motivations for holding cash vary across firms. Some hold cash to meet operating needs whereas others keep cash on hand to weather financial crises or take advantage of investment opportunities. In the first part of this paper, we will begin by looking at the extent of cash holdings at publicly traded firms and some of the motives for the cash accumulation. We will also look at how best to value these cash holdings in both discounted cash flow and relative valuation models. In the second part of the paper, we will turn to a trickier component - cross holdings in other companies. We will begin by looking at the way accountants record these holdings and the implications for valuation. We will then consider how to incorporate the value of these cross holdings in a full information environment, followed by approximations that work when information about cross holdings is partial or missing.

Cash Holdings and Business Conditions

Abstract: We investigate the relation between business conditions and corporate liquidity decisions by US firms. We find strong evidence that financially constrained firms hold more cash during recessions and that business conditions are significant to constrained firms' cash decisions. In contrast, we find weak evidence that financially unconstrained firms adjust cash holdings according to the business cycle. This asymmetric behavior is more pronounced for changes in the short-term interest rate. Moreover, we find that firms increase the level of liquidity during periods of tighter credit conditions. Our findings support both the precautionary motive for holding cash and the pecking order theory.

Do Past Performance and Past Cash Flows Explain Current Cash Flows into Retail Superannuation Funds in Australia

Abstract: This paper examines the link between current-quarter cash flows and both past performance and past cash flows using a sample of Australian retail superannuation fund data (managed growth and managed stable) drawn from the period 1994 to 2000. This is a rapidly growing sector within the superannuation industry and it reflects investment behaviour of smaller investors rather than institutions and large corporations. Using both the Gruber (1996) approach and panel-data analysis we find a positive relationship between past performance and current-quarter cash flows as well as evidence of persistence in cash flows over time. Panel-data analysis also identifies a positive relationship between current net cash flows and past performance and cash inflows as well as a negative relationship between current net cash flows and past outflows. Market-wide growth in the retail superannuation sector over the study period does not appear to be driving these results.