Showing papers on "Cash flow forecasting published in 2007"

Financial Constraints, Investment, and the Value of Cash Holdings

Abstract: We provide robust evidence that cash holdings are more valuable for financially constrained firms than for unconstrained firms and investigate why this is so. Our results indicate that greater cash holdings are associated with higher levels of investment for both constrained and unconstrained firms, but that the marginal value of investment is greater for constrained firms. These findings suggest that higher cash holdings allow constrained firms to undertake value-increasing projects that might otherwise be bypassed. As such, the evidence is consistent with the hypothesis that greater cash holdings of constrained firms are a value-increasing response to costly external financing.

Why Do Firms Hold So Much Cash? A Tax-Based Explanation

Abstract: U.S. corporations hold significant amounts of cash on their balance sheets, and these cash holdings have been justified in the existing empirical literature by transaction costs and precautionary motives. An additional explanation, considered in this study, is that U.S. multinational firms hold cash in their foreign subsidiaries because of the tax costs associated with repatriating foreign income. Consistent with this hypothesis, firms that face higher repatriation tax burdens hold higher levels of cash, hold this cash abroad, and hold this cash in affiliates that trigger high tax costs when repatriating earnings. Estimates indicate that a one standard deviation increase in the tax burden from repatriating foreign income is associated with a 7.9% increase in the ratio of cash to net assets. In addition, certain firms, specifically those that are less financially constrained domestically and those that are more technology intensive, exhibit a higher sensitivity of affiliate cash holdings to repatriation tax burdens.

The Corporate Propensity to Save

Abstract: Why and how do corporations accumulate liquid assets? We show theoretically that intertemporal trade-offs between interest income taxation and the cost of external finance determine optimal savings. We find the striking result that, controlling for Tobin's q, saving and cash flow are negatively related because firms lower cash reserves to invest after receiving positive cash-flow shocks, and vice versa. Consistent with theory, we estimate negative propensities to save out of cash flow. We also find that income uncertainty affects saving more than do external finance constraints. Therefore, contrary to previous evidence, saving propensities reflect too many individual forces to be used to measure external finance constraints.

Optimal long-term financial contracting

Abstract: We develop an agency model of financial contracting. We derive long-term debt, a line of credit, and equity as optimal securities, capturing the debt coupon and maturity; the interest rate and limits on the credit line; inside versus outside equity; dividend policy; and capital structure dynamics. The optimal debt-equity ratio is history dependent, but debt and credit line terms are independent of the amount financed and, in some cases, the severity of the agency problem. In our model, the agent can divert cash flows; we also consider settings in which the agent undertakes hidden effort, or can control cash flow risk.

Corporate cash holdings: Evidence from Switzerland

Abstract: This paper investigates the determinants of cash holdings for a comprehensive sample of Swiss non-financial firms between 1995 and 2004. The median Swiss firm holds almost twice as much cash and cash equivalents as the median US or UK firm. Our results indicate that asset tangibility and firm size are both negatively related to corporate cash holdings, and that there is a non-linear relationship between the leverage ratio and liquidity. Dividend payments and operating cash flows are positively related to cash reserves, but we cannot detect a significant relationship between growth opportunities and cash holdings. Most of these empirical findings, but not all of them, can be explained by the transaction costs motive and/or the precautionary motive. Analyzing the corporate governance structures of Swiss firms, we document a non-linear relationship between managerial ownership and cash holdings, indicating an incentive alignment effect and an opposing effect related to increasing risk aversion. Finally, our results suggest that firms in which the CEO simultaneously serves as the COB hold significantly more cash.

Is Cash Flow King in Valuations

Abstract: Contrary to the common perception that operating cash flows are better than accounting earnings at explaining equity valuations, recent studies suggest that valuations derived from industry multiples based on reported earnings are closer to traded prices than those based on reported operating cash flows. The question addressed in the article is whether the balance tilts in favor of cash flows when the following are considered: (1) forecasts rather than reported numbers, (2) dividends rather than operating cash flows, (3) individual industries rather than all industries combined, and (4) companies in non-U.S. markets. In all cases studied, earnings dominated operating cash flows and dividends. ndustry multiples are used often in practice, both to provide stand-alone “quick and dirty” valuations and to anchor more-complex discounted cash flow valuations. To obtain a company valuation, one simply multiplies a value driver (such as earnings) for the company by the corresponding multiple, which is based on the ratio of stock price to that value driver for a group of comparable companies. Choices for value drivers include various measures of cash flow, book value, earnings, and revenues, but earnings and cash flows are by far the most commonly used. In the study reported here, we compared the valuation performance of earnings multiples with the performance of multiples based on two measures of cash flow— operating cash flow and dividends—for a large sample of companies drawn from 10 national markets. “Valuation performance” in our study does not refer to picking mispriced stocks. 1 We focused

The determinants of corporate cash management policies: Evidence from around the world

Abstract: We examine the determinants of corporate cash management policies across a broad sample of international firms. We document that firms in countries with strong legal protection of minority investors are more likely to decrease their cash holdings in response to an increase in cash flow than are firms in countries with weak legal protection. This relationship is most pronounced for firms that are financially constrained and those with high hedging needs. More importantly, we do not find evidence that financial development plays an incremental impact on the cash flow sensitivity of cash, after controlling for the effect of legal protection. Therefore, we argue that the legal protection of investors (rather than financial development) represents the first-order effect in influencing international firms' cash management policies. The results are robust to alternative specifications. In general, our findings reinforce the importance of country-level legal protection of investors in mitigating the effects of firm-level financial constraints and hedging needs on corporate cash management policies.

Financial market development and the importance of internal cash: Evidence from international data

Abstract: We examine the impact of financial market development on the extent to which firms have to rely on internal capital for making investments. Using international data from 31 countries for the 1987–1997 period, we find evidence of a negative relationship between financial market development and the importance of internal capital. The evidence is consistent across different estimation procedures, alternative measures of financial constraints and cash flow, and the use of bootstrapped standard errors. Finally, we find that the distortionary effect of negative cash flow observations reported earlier for US data extends to international data as well.

Additional International Evidence on Corporate Cash Holdings

Abstract: This paper investigates corporate cash holding behaviour in Japan, France, Germany, and the UK using data for 3,989 companies over the period 1983-2000. Our findings reveal that a country's legal structure and ownership structure of firms play a significant role in determining cash holdings. We observe that higher degree of shareholder (creditor) protection is associated with lower (higher) cash holdings and ownership concentration exerts a negative impact on cash levels. Moreover, the dynamic cash holding analysis indicates that firms tend to adjust their cash levels towards a target cash structure. The speed of adjustment of cash holdings for France, Germany and Japan is found to be similar while firms in the UK seem to adjust to the target cash level more quickly.

Walking up the down escalator : public investment and fiscal stability

Abstract: When growth-promoting spending is cut so much that the present value of future government revenues falls by more than the immediate improvement in the cash deficit, fiscal adjustment becomes like walking up the down escalator. Although short-term cash flows matter, too tight a focus on them encourages governments to invest too little. Cash-flow targets also encourage governments to shift investment spending off budget by seeking private investment in public projects, irrespective of its real fiscal or economic benefits. To deal with this problem, some observers have suggested excluding certain investments (such as those undertaken by public enterprises deemed commercial or financed by multilaterals) from cash-flow targets. These stopgap remedies may help protect some investments, but they do not provide a satisfactory solution to the underlying problem. Governments can more effectively reduce the biases created by the focus on short-term cash flows by developing indicators of the long-term fiscal effects of their decisions, including accounting and economic measures of net worth, and, where appropriate, including such measures in fiscal targets or even fiscal rules.

The Balance Sheet Channel of Monetary Policy Transmission: Evidence from the UK

Abstract: This paper examines the sensitivity of investment to cash flow using a panel of UK firms in manufacturing with a view to shedding some light on the existence of a balance sheet channel or financial accelerator. In addition to examining the impact of cash flow in different subsamples based on company size or financial policy (dividend payouts, share issues and debt accumulation), we also investigate the extent to which investment becomes more sensitive to cash flow in periods of monetary tightness. To this end, we employ a monetary tightness indicator constructed for the UK using the narrative approach pioneered by Romer and Romer. The results provide some support for the view that UK firms show greater investment sensitivity to cash flow during periods of tight monetary policy. Keywords: financial constraints, balance sheet channel, investment. JEL Classification: E22, E52, E44 Acknowledgements: We would like to thank Clive Massey at SWURCC at the University of Bath for his assistance in accessing the data used in this study. Tim Gallagher provided painstaking and conscientious research assistance financed, in part, by the Faculty of Social Sciences Small Grants Committee at the University of Kent at Canterbury.

Commercial currency handling and servicing management

Abstract: Aspects of the invention provide for an end-to-end currency handling, and servicing apparatus. The apparatus may be used in any cash-centric business or enterprise for cash register till set up and balancing, back office reconciliation, and other cash payment handling activities. Further aspects of the invention provide real-time access to cash receipts for enterprise use in making financial and planning decisions.

A Decision Support Model for Construction Cash Flow Management

Abstract: The excessive level of construction business failures and their association with financial difficulties has placed financial management in the forefront of many business imperatives. This has highlighted the importance of cash flow forecasting and management that has given rise to the development of several forecasting models. The traditional approach to the use of project financial models has been largely a project-oriented perspective. However, the dominating role of “project economics” in shaping “corporate economics” tends to place the corporate strategy at the mercy of the projects. This article approaches the concept of cash flow forecasting and management from a fresh perspective. Here, the use of forecasting models is extended beyond their traditional role as a guideline for monitoring and control of progress. They are regarded as tools for driving the project in the direction of corporate goals. The work is based on the premise that the main parties could negotiate the terms and attempt to complement their priorities. As part of this approach, a model is proposed for forecasting and management of project cash flow. The mathematical component of the model integrates three modules: an exponential and two fourth-degree polynomials. The model generates a forecast by potentially combining the outcome of data analysis with the experience and knowledge of the forecaster/organization. In light of corporate objectives, the generated forecast is then manipulated and replaced by a range of favorable but realistic cash flow profiles. Finally, through a negotiation with other parties, a compromised favorable cash flow is achieved. This article will describe the novel way the model is used as a decision support tool. Although the structure of the model and its mathematical components are described in detail, the data processing and analysis parts are briefly described and referenced accordingly. The viability of the model and the approach are demonstrated by means of a scenario.

Investment opportunities, free cash flow, and stock valuation effects of secured debt offerings

Abstract: This paper examines the role of investment opportunities and free cash flow in explaining the source of the stock valuation effects of secured debt offerings. We find a significantly positive relation between a firm's investment opportunities and its stock price response to announcements of secured debt issues. This evidence supports the investment opportunities hypothesis that secured debt financing is more valuable for issuing firms with high growth opportunities. In contrast, we find a lack of support for the free cash flow hypothesis. These findings hold even after controlling for other potentially influential variables. Our study provides a better understanding of the relative importance of various potential determinants in explaining the variation in the valuation impact of secured debt issues.

The cash flow sensitivity of cash: evidence from Taiwan

Abstract: This article examines the role of operating cash flow in firm cash policies using an unbalanced panel of 988 Taiwanese firms. The main findings are as follows: (i) Both financially constrained and unconstrained firms display positive cash flow sensitivity of cash, indicating that capital market friction is prevalent in Taiwan. The result is in sharp contrast to the US result in Almeida et al. (2004) in that only constrained firms save cash out of their operating cash flow. (ii) The estimated cash flow sensitivity of cash for financially constrained firms is significantly higher than that of financially constrained firms in the USA. Our results imply that a financially constrained firm (i.e. a firm that is younger, has a looser relation with banks, or has negative investment-dividend correlation) saves 0.246 to 0.307 dollar out of an additional dollar of operating cash flow. An unconstrained firm saves 0.024 to 0.101 less dollars. (iii) Firms that have ever issued public debt save more cash out of their op...

Earnings Volatility, Cash Flow Volatility and Informed Trading

Abstract: I examine whether earnings that are smoother or more volatile than cash flows provide or garble information. Consistent with theories that predict more informed trading when public information is less informative, I find that bid-ask spreads and the probability of informed trading are higher both when earnings are smoother than cash flows and also when earnings are more volatile than cash flows. Additional tests suggest that managers' discretionary choices that lead to smoother or more volatile earnings than cash flows garble information, on average. However, I find that informed trading is attenuated in settings in which theory suggests that discretionary smoothing or volatizing of earnings is likely to be informative.

Financial Innovation and the Transactions Demand for Cash

Abstract: We document cash management patterns for households that are at odds with the predictions of deterministic inventory models that abstract from precautionary motives. We extend the Baumol-Tobin cash inventory model to a dynamic environment that allows for the possibility of withdrawing cash at random times at a low cost. This modification introduces a precautionary motive for holding cash and naturally captures developments in withdrawal technology, such as the increasing diffusion of bank branches and ATM terminals. We characterize the solution of the model and show that qualitatively it is able to reproduce the empirical patterns. Estimating the structural parameters we show that the model quantitatively accounts for key features of the data. The estimates are used to quantify the expenditure and interest rate elasticity of money demand, the impact of financial innovation on money demand, the welfare cost of inflation, the gains of disinflation and the benefit of ATM ownership.

Default probability for the Jordanian companies: a test of cash flow theory

Abstract: This paper aims to investigate the effect of cash flow and free cash flow on corporate failure in the emergingmarket in particular Jordan using two samples; matched sample and a cross-sectional time-series (panel data)sample representative of 167 Jordanian companies in 1989-2003. LOGIT models are used to outline therelationship between firms’ financial health and the probability of default. Our results show that there is firm’sfree cash flow increases corporate failure. The result also shows that the firm’s cash flow decreases corporatefailure. Firms’ capital structures are fundamental in predicting default. Capital structure is seen as the mainfactor affecting the probability of default as it affects a firm’s ability to access external sources of funds.Jordanian firms depend on short-term debt for both short and long term financing. Keywords default, cash flow, captial structure, short-term debt Publication Details This article was originally published as Zeitun, R, Tian, G and Keen, K, Default probability for the JordanianCompanies: A Test of Cash Flow Theory, International Research Journal of Finance and Economics, 8,147-62, 2007.

Local public financial management

Abstract: This volume provides an overview of local government financial accounting and reporting and where better practices in cash management are documented. The use of transparent procurement processes to mitigate corruption is also elaborated on while practical guidance is imparted on how and when to use debt, how to assess debt affordability, what debt to use, how to issue debt, and how to manage debt. The use of internal controls and audits to ensure efficiency and integrity is highlighted in this volume with particular emphasis on the role of external audit in combating corruption. Audit methods to detect corruption are also presented and discussed. The volume represents a collaborative effort of the Swedish International Development Cooperation Agency and the World Bank Institute to support reform of the public expenditure management and financial accountability systems in developing countries, especially in Africa.

Cash Flow Projections for Selected TxDoT Highway Projects

Abstract: In planning for contractor payments, an owner with multiple projects needs to estimate the amount of money to be paid to contractors in coming months. For an owner as large as the Texas Department of Transportation (TxDoT), one is faced with the problem of organizing the budget to ensure that there are sufficient funds for all projects. This investigation was requested by TxDoT to provide a tool to forecast future project payments. Recent account summaries of TxDoT projects from 2001 to 2003 were analyzed for creating mathematical models representing monthly payments for various projects. The data were organized into categories of project types and subcategories of project contract amount. A fourth degree polynomial regression analysis was run on the data and the regression curve, when statistically significant, was taken to be the forecast payment curve. Finally, a computer program was developed to implement the results of the investigation for TxDoT's needs. The methodology provided will help other highway agencies to create their own equations to better predict project cash flows and trends. This investigation might also benefit researchers in projecting cash flows and trends, while also allowing for improvements.

The influence of firm‐ and ceo‐specific characteristics on the use of nonlinear derivative instruments

Abstract: We examine why firms use nonlinear derivatives (e.g., options). Our results suggest that option characteristics in investment opportunities and debt, the payoff structure of incentive compensation, and free cash-flow agency problems influence the firm's choice. Investment opportunities, internally generated cash flow, business risk, and option compensation positively influence the use of nonlinear currency derivatives. Option feature in bonds positively influence the use of nonlinear interest rate derivatives, whereas bonus and stock compensation, and CEO tenure have a negative influence. In sum, nonlinear cash flow characteristics in investment opportunity, debt, and executive compensation all relate positively to nonlinear derivative usage.

Cash holdings, corporate governance and financial constraints

Abstract: We examine the relation between cash holdings, quality of governance and financial constraints. We find that firms with strong shareholder rights hold more cash, contrary to the predictions of agency theory. This result is partly due to the positive correlation that exists between governance quality measures and the degree of financial constraint faced by the firm. We show that governance quality has no impact on cash holdings by financially unconstrained firms. It does, however, have a positive impact on the cash holdings of certain financially constrained firms, particularly family firms. Anti-takeover provisions give these firms extra flexibility, enabling them to issue shares without the founding family losing control, and provide an alternative to high cash holdings.

Measuring Free Cash Flows for Equity Valuation: Pitfalls and Possible Solutions

Abstract: In recent years, cash flow metrics have become increasingly popular as investors describe cash flows as more intuitive, more easily measured, and less prone to manipulation. However, many pitfalls exist in using standard cash flow measures because of the lack of consensus about what cash flow should include. In an article published in the Financial Analysts Journal in 1974, Joel M. Stern defined free cash flow (FCF) as net operating profit after taxes minus the amount of new capital invested. In practice, however, investors attempting to compare free cash flow from company to company will find a variety of different measures. Some companies define FCF as reported cash from operations minus capital expenditures. Other companies add some portion of the cash spent on mergers and acquisitions as well as financing payments, such as preferred and common dividends. Cash flows according to GAAP are not better and suffer from several limitations, such as inconsistency, misclassification, ease of manipulation, and measurement error. Other non-GAAP free cash flows also suffer from inconsistency and ignore important economic factors.

An evaluation of the usefulness of cash flow ratios to predict financial distress

Abstract: Purpose: With the introduction of the cash flow statement it became an integral part of financial reporting. A need arose to develop ratios for the effective evaluation of cash flow information. This article investigates cash flow ratios suggested by various researchers and suggests a list of ratios with the potential to predict financial failure. Design: The cash flow ratios suggested by researchers, from as early as 1966, are investigated and eight cash flow ratios selected for inclusion in an analysis to predict financial failure. Ten failed entities are selected for a cash flow evaluation by means of the selected ratios for five years prior to failure. For a comparison, non-failed entities in similar sectors are selected and also evaluated by means of the cash flow ratios. The mean values of each ratio, for each year prior to failure, were then calculated and the means of the failed entities were compared to the non-failed entities. Findings: The comparison revealed that cash flow ratios have predictive value with the cash flow to total debt identified as the best indicator of failure. It was also determined that, although failed entities have lower cash flows than non-failed entities, they also had smaller reserves of liquid assets. Furthermore, they have less capacity to meet debt obligations and they tend to incur more debt. The ratios of the failed entities were unstable and fluctuated from one year to the next. Finally, bankruptcy could be predicted three years prior to financial failure. Implications: Income statement and balance sheet ratios are not enough to measure liquidity. An entity can have positive liquidity ratios and increasing profits, yet have serious cash flow problems. Ratios developed from the cash flow statement should supplement traditional accrual-based ratios to provide additional information on the financial strengths and weaknesses of an entity .

Discussion of Investor Protection and Analysts' Cash Flow Forecasts Around the World

Abstract: DeFond and Hung (2007) test the conjecture whether financial analysts, due to demand-side pressure, compensate for the limited usefulness of reported earnings by issuing cash flow forecasts. They find that analysts supplement their earnings forecasts more frequently with cash flow forecasts in countries where antidirector rights and legal enforcement quality are poor. In my discussion, I examine their hypothesis development and empirical research design and try to extend their arguments to a time-series setting. As it turns out, the paper's main contention critically hinges on two assumptions: (1) investors' unsatisfied demand for accounting information and (2) their willingness to rely on cash flow forecasts as valuable information signals. The descriptive validity of these assumptions in an international context is a priori not obvious. I then test whether substantial changes in investor protection and/or earnings quality relate to changes in the frequency of cash flow forecasts. My analyses show that analysts' propensity to issue cash flow forecasts increases after the first prosecution under insider trading laws, after non-U.S. firms have cross-listed their shares on a U.S. exchange, or after firms have voluntarily replaced their domestic accounting standards with IFRS or U.S. GAAP. Thus, I conclude that the reasoning behind the levels results does not simply extend to a changes setting.

A regional multiplier approach to estimating the impact of cash transfers: The case of cash aid in rural Malawi

Abstract: This paper analyses the impact on the local economy of an emergency cash transfer programme in rural Malawi. The results are of interest given the growing use of cash transfers as development aid as well as the increasing popularity of such transfers as a form of social protection across Sub-Saharan Africa. Using a form of social accounting matrix, we find that there are widespread benefits for regional economy as a whole (with multiplier estimates of 2.02 to 2.45) and for certain groups in particular. Small farmers and small businesses gain particular advantage as this is where poorer households’ purchases are focused; education and health also benefit. Such payments can also help to support the regional economy during the most “lean” periods of the year.

The Incremental Predictive Ability of Accrual Models With Respect to Future Cash Flows

Abstract: Prior studies on the incremental predictive ability of accrual models over cash flow models with respect to future cash flows have led to conflicting results. This paper presents an accrual-based cash flow prediction model based on a random walk in cash flows adjusted for the reversal of current payables and receivables. Results indicate that this simple accrual model predicts future cash flows (out-of-sample) better than models based on current cash flows alone. This paper also provides a more sophisticated accrual model by extending the model of the accrual process developed by Barth, Cram, and Nelson (2001) to include cash flow implications of growth in future sales. This more sophisticated accrual-based prediction model estimated via WLS (while pooling the prior three years of observations) predicts future cash flows better than both the simple accrual reversal model and the cash flow-based models, indicating that the accrual model contains information about future cash flow beyond the simple mechanical reversal of accruals. One explanation is that accruals may contain information regarding future sales. Consistent with this explanation, the paper finds that the accrual-based WLS model is superior to the cash flow-based model in capturing the effect of future sales on future cash flows. To determine whether the improved forecast accuracy is large enough to affect decision-making by financial statement users, the deciles of firms ranked on forecasted cash flow are compared to the deciles of firms ranked on actual future cash flow. The accrual-based model is superior to the cash flow-based model in placing firms into the correct deciles of actual future cash flow.

A flexible neural network for ATM cash demand forecasting

Abstract: The paper presents an artificial neural network based approach in support of cash demand forecasting for automatic teller machine (ATM). On the start phase a three layer feed-forward neural network was trained using Levenberg-Marquardt algorithm and historical data sets. Then ANN was retuned every week using the last observations from ATM. The generalization properties of the ANN were improved using regularization term which penalizes large values of the ANN weights. Regularization term was adapted online depending on complexity of relationship between input and output variables. Performed simulation and experimental tests have showed good forecasting capacities of ANN. At current stage the proposed procedure is in the implementing phase for cash management tasks in ATM network.