Showing papers on "Cash flow forecasting published in 2009"
TL;DR: In this paper, the authors show that corporate cash holdings are a key driver of product market performance and provide evidence that larger relative-to-rivals cash reserves lead to systematic future market-share gains at the expense of industry rivals.
Abstract: This paper shows that corporate cash holdings is a key driver of product market performance. In particular, I provide evidence that larger relative-to-rivals cash reserves lead to systematic future market-share gains at the expense of industry rivals. Importantly, this “competitive” effect of cash turns out to be magnified when rivals face tighter financing constraints and when the amount of strategic interactions between competitors is substantial. Overall, the results suggest that corporate cash policy comprises a substantial strategic dimension.
590 citations
TL;DR: In this article, the authors examined whether the firm-level accrual and cash flow effects extend to the aggregate stock market and found that aggregate accruals are a strong positive time series predictor of aggregate stock returns, and cash flows is a negative predictor.
245 citations
Posted Content•
TL;DR: In this article, the authors examine whether and if so, how a U.S. cross-listing mitigates the risk that managers will squander corporate cash holdings.
Abstract: We examine whether and, if so, how a U.S. cross-listing mitigates the risk that managers will squander corporate cash holdings. We find strong evidence that the value investors attach to excess cash reserves is substantially larger for foreign firms listed on U.S. exchanges and over the counter than for their domestic peers. Further, we show that this excess-cash premium stems not only from the strength of U.S. legal rules and disclosure requirements designed to safeguard investors’ money, but also from increased monitoring by financial analysts and large investors. Overall, since investors’ valuation of excess cash mirrors how they expect the cash to be used, our analysis shows that a U.S. listing constrains managers’ inefficient allocation of corporate cash reserves significantly.
222 citations
TL;DR: In fact, more cash holdings are a feature of riskier companies and firms with higher growth opportunities as discussed by the authors, while more cash is held by firms with longer cash conversion cycles and lower financing deficits, as predicted by the pecking order theory.
Abstract: Results from about 17,000 Italian private companies and 152,000 firm-year observations in the 1996-2005 period show that cash holdings in private firms support both the trade-off model and the financing hierarchy theory. In fact, more cash holdings are a feature of riskier companies and firms with higher growth opportunities. At the same time, more cash is held by firms with longer cash conversion cycles and lower financing deficits, as predicted by the pecking order theory. Reported evidence also shows that private firms that pay dividends hold more cash, that cash can be considered as negative debt, and net working capital represents a good cash-substitute. Macroeconomic and industry variables do not play a significant role, though firm’s specific risk draws its relevance from industry risk. Additional evidence shows that cash rich companies tend to invest more in a medium-term future horizon and small firms tend to hold more cash equivalents.
215 citations
TL;DR: This article examined whether analysts' earnings forecasts are more accurate when they also issue cash flow forecasts, and they found that more accurate cash flow forecast decreases the likelihood of analysts being fired, suggesting that the forecast accuracy is relevant to analysts' career outcomes.
Abstract: We examine whether analysts’ earnings forecasts are more accurate when they also issue cash flow forecasts. We find that (i) analysts’ earnings forecasts issued together with cash flow forecasts are more accurate than those not accompanied by cash flow forecasts, and (ii) analysts’ earnings forecasts reflect a better understanding of the implications of current earnings for future earnings when they are accompanied by cash flow forecasts. These results are consistent with analysts adopting a more structured and disciplined approach to forecasting earnings when they also issue cash flow forecasts. Finally, we find that more accurate cash flow forecasts decrease the likelihood of analysts being fired, suggesting that cash flow forecast accuracy is relevant to analysts’ career outcomes.
159 citations
TL;DR: In this article, the authors explore the predictive value of direct method cash flow disclosures and find evidence that market participants utilize direct method disclosures for their stated purpose: to better forecast future operating performance.
Abstract: Motivated by recent FASB, IASB, and CFA Institute comments, we explore the predictive value of direct method cash flow disclosures. A primary stated purpose of the direct method is to better forecast future performance. To examine this purpose, we first document that direct method line items, such as cash received from customers, are not reliably estimable using income statements and either balance sheets or indirect method statements of cash flows. When these stimation (articulation) errors are included in cash flows and earnings forecasting models, forecasting performance significantly improves. In addition, employing a future ERC (FERC) methodology, we find evidence suggesting that market participants utilize direct method disclosures for their stated purpose: to better forecast future operating performance. After conducting several tests for self‐selection concerns, we conclude that the direct method is valuable to investors when forecasting future cash flows and earnings.
146 citations
TL;DR: The authors examined the relationship between uncertainty avoidance, multinationality and firm cash holdings and found that firms in countries with high uncertainty avoidance hold more cash as a way to hedge against undesired states of nature.
136 citations
TL;DR: In this paper, the authors examined the factors influencing the cash holdings of REITs with the view that the REIT industry should yield new information regarding the drivers of corporate cash policy due to their unique operating conditions.
Abstract: The factors influencing the cash holdings of REITs are examined with the view that the REIT industry should yield new information regarding the drivers of corporate cash policy due to their unique operating conditions. The availability of REIT line of credit data also allows us to test the association between cash holdings and line of credit access and use. Data constraints in prior investigations have left this an unresolved empirical question in the cash holdings literature. The baseline results show that REIT cash holdings are inversely related to funds from operations, leverage, and internal advisement and are directly related to the cost of external finance and growth opportunities. Cash holdings are also negatively associated with credit line access and use. The results imply that REIT managers elect to hold little cash to reduce the agency problems of cash flow thereby increasing transparency and reducing the future cost of external capital.
130 citations
TL;DR: In this paper, the authors provide large sample empirical evidence that the value relevance of earnings explains a significant amount of the cross-sectional variation in the pay-sensitivity of earnings.
Abstract: Accounting performance measures such as earnings and cash flows are useful for both valuation and performance evaluation purposes. However, little evidence exists on whether there is any association between these two roles. In this study, we provide large sample empirical evidence that the value relevance of earnings explains a significant amount of the cross-sectional variation in the pay-sensitivity of earnings and the incremental value relevance of cash flows explains variation in the marginal pay-sensitivity of cash flows. We document that while both value relevance and compensation weight on earnings decline from the subperiod of 1993 to 1997 to the subperiod of 1998 to 2003, both value relevance and compensation weight on cash flows increase from the earlier subperiod to the later subperiod. Overall, our results provide additional evidence that value relevance of a performance measure plays a significant role in its use for performance evaluation.
117 citations
TL;DR: In this article, the authors show that national culture influences corporate managers' cash holding behavior beyond the effects of corporate governance and financial market developments in each country through the perception of agency costs and value of financial flexibility.
116 citations
01 Jun 2009
TL;DR: In this paper, the authors examined whether high surplus free cash flow is related to earnings management and found that the positive relationship between surplus-free cash flow and earnings management is moderated by independent audit committee.
Abstract: The objective of this study is to examine whether high surplus free cash flow is related to earnings management. This study hypothesizes managers of high surplus free cash flow companies have incentive to engage in earnings management. However, earnings management occurs less frequently when the audit committee is more independent. Independent audit committees provide an effective monitoring over earnings management practices. This study expects that the positive relationship between surplus free cash flow and earnings management is moderated by independent audit committee. Using a sample of 155 companies listed on the main board of Bursa Malaysia in 2001, this study obtains empirical evidence consistent with the prediction in all hypotheses. This study shows that independent audit committee help companies with high surplus free cash flow to reduce income increasing earnings management practices.
TL;DR: In this paper, the authors used panel data for firms listed in the Spanish stock exchange over the period from 1995 to 2001 to analyse the effect of accounting quality on cash holdings, finding that firms with good accruals quality hold lower cash levels than firms with poor accrual quality.
Abstract: This work uses panel data for firms listed in the Spanish stock exchange over the period from 1995 to 2001 to analyse the effect of accounting quality on cash holdings. The results show that firms with good accruals quality hold lower cash levels than firms with poor accruals quality. This finding suggests that the quality of accounting information may reduce the negative effects of information asymmetries and adverse selection costs, allowing firms to reduce their level of corporate cash holdings. The results also show that cash holdings decrease when firms increase their use of bank debt and in the presence of cash substitutes. In contrast with this, firms with higher cash flow hold higher levels of cash.
TL;DR: In this article, investment and liquidity management are analyzed in a sector in which firms are exogenously cash constrained, and empirical estimates of Tobin's q provide reliable measures of investment opportunity.
Abstract: ∗∗∗ Investment and liquidity management are analyzed in a sector in which firms are exogenously cash constrained and empirical estimates of Tobin’s q provide reliable measures of investment opportunity. Across the entire sector, we document substantial realized investment as well as high investment sensitivity to q. Investment is also sensitive to measures of financial market frictions, suggesting that constraints on retention of cash flow distort investment decisions. Liquidity is managed through dividend policy and access to short-term bank finance, in which bank lines of credit smooth variation in available cash flow and accelerate investment. Using the Kaplan‐Zingales method for measuring the degree of financial constraint, we identify substantial differences between investment and liquidity management policies of firms, in which more (less) financially constrained firms in our sample exhibit high (low) investment and liquidity management sensitivity to variables that measure financial market frictions. This study analyzes investment by firms organized as real estate investment trusts (REITs). REITs generally hold ownership interests in commercial real estate assets and are required to pay out at least 90% of their taxable income as dividends, implying that the entire sector is constrained in its ability to retain cash. 1 Table 1 shows that from 1990 through 2003 REITs paid higher dividends with less resulting net cash flow and a lower stock of cash than nonREIT corporations, which have no formal requirements to pay out income as dividends.
TL;DR: A practical model is developed that should allow Taiwan construction firms to utilize the currently available cash and assets at any point in time in the most rational way to achieve good liquidity and profitability.
Abstract: Construction firms that work on a contractual basis are generally more concerned with short-term rather than long-term financial strategies. The main focus in short-term financial strategies is on working capital management (WCM). Cash management is a major factor for achieving good liquidity and profitability. In this study we take into consideration the cash component of working capital management based on the target cash balance. We develop a practical model that should allow Taiwan construction firms to utilize the currently available cash and assets at any point in time in the most rational way. To help understand the issues involved, we first introduce a model developed by Miller and Orr. The relationship between project duration and progress towards completion is most effectively represented in practical construction management by the S-curve. Thus, in this study we plot the fuzzy S-curve regression based on the Takagi-Sugeno (T-S) fuzzy model. The practicality of the model is demonstrated using project cash flow and progress payment records from a sample project. The data are obtained from the Taipei City Government's Department of Rapid Transit Systems. Some tentative conclusions concerning the model are also given.
TL;DR: In this article, the authors suggest an optimal cash conversion cycle as more accurate and comprehensive measure of working capital management, where the authors identify optimal levels of inventory, receivables, and payables where total holding and opportunities cost are minimized.
Abstract: The traditional link between the cash conversion cycle and the firm's profitability is that shortening the cash conversion cycle increases firm's profitability. On the other hand shortening the cash conversion cycle could harm the firm’s operations and reduces profitability. However, identifying optimal levels of inventory, receivables, and payables where total holding and opportunities cost are minimized and recalculating the cash conversion cycle according to these optimal points provides more complete and accurate insights into the efficiency of working capital management. In this regard, we suggest an optimal cash conversion cycle as more accurate and comprehensive measure of working capital management.
Posted Content•
TL;DR: In this article, the authors examine whether and how a U.S. cross-listing mitigates the risk that insiders will turn their firm's cash holdings into private benefits.
Abstract: We examine whether and how a U.S. cross-listing mitigates the risk that insiders will turn their firm’s cash holdings into private benefits. We find strong evidence that the value investors attach to excess cash reserves is substantially larger for foreign firms listed on U.S. exchanges and over the counter than for their domestic peers. Further, we show that this excess-cash premium stems not only from the strength of U.S. legal rules and disclosure requirements, but also from the greater informal monitoring pressure that accompanies a U.S. listing. Overall, since investors’ valuation of excess cash mirrors how they expect the cash to be used, our analysis shows that a U.S. listing constrains insiders’ inefficient allocation of corporate cash reserves significantly.
TL;DR: In this article, the authors identify the root causes and scrutinises the suitable mitigation actions of financial-related project delays, and highlight the importance of having more intensive research that give emphasis on clients achieving a well-managed cash flow in order to obtain a prompt payment practice in the construction industry.
Abstract: Delay in construction projects is a common phenomenon and a costly problem. This paper addresses the issues of financial-related delays in construction projects. It identifies the root causes and scrutinises the suitable mitigation actions of financial-related project delays. Four main factors were identified in the literature, namely late payment, poor cash flow management, insufficient financial resources and financial market instability. Primary data were collected by way of a preliminary interview, questionnaire survey and in-depth structured interviews. A total of 110 responses were obtained from a combination of clients, contractors, consultants and bankers. The result revealed that poor cash flow management is the most significant factor that leads to a project's delay followed by late payment, insufficient financial resources and financial market instability. Contractors' instable financial background, client's poor financial and business management, difficulties in obtaining loan from financiers and inflation were identified as the most significant underlying causes. The study findings indicate that clients play the most important role in reducing the impact of financial problems towards the extent of project's delay. Several suitable mitigation actions were suggested by the respondents. The study highlights the importance of having more intensive research that give emphasis on clients achieving a well-managed cash flow in order to obtain a prompt payment practice in the construction industry.
TL;DR: In this article, a heuristic method is proposed for scheduling multiple concurrent projects subject to cash constraints, based on integer programming (IP) technique, to determine cash availability during a given period, identifies all possible activities' schedules, determines the cash requirements for each schedule, ranks schedules based on the contribution to minimizing the increase in the project duration, schedules all activities of the selected schedule and determines the impact of the scheduled activities on the project cash flow.
Abstract: A heuristic method is proposed for scheduling multiple projects subject to cash constraints. The heuristic determines cash availability during a given period, identifies all possible activities' schedules, determines the cash requirements for each schedule, ranks schedules based on the contribution to minimizing the increase in the project duration, schedules all activities of the selected schedule and determines the impact of the scheduled activities on the project cash flow. The effectiveness of the heuristic method was validated by comparing the results with the optimum results obtained by using the integer programming (IP) technique for 15 networks comprising up to 60 activities. The comparison indicated that the solutions obtained using the proposed heuristic are very comparable to the optimum solutions. An example of two concurrent projects was presented to demonstrate the proposed heuristic method. The proposed heuristic offers the ultimate flexibility to enter cash outflows and inflows at the actu...
TL;DR: In this article, the authors investigate how decomposing the forecasting task and altering the presentation format combine to enable analysts and nonprofessional investors to acquire and accurately process financial statement information when operating cash flows and accruals are differentially persistent.
Abstract: This study uses an experiment to examine (1) what factors give rise to investors' inability to fully incorporate operating cash flows and accruals into their earnings forecasts, and (2) what conditions help to improve investors' forecast accuracy when operating cash flows and accruals exhibit differential persistence. I investigate how decomposing the forecasting task and altering the presentation format combine to enable analysts and nonprofessional investors to acquire and accurately process financial statement information when operating cash flows and accruals are differentially persistent. I find that the earnings forecasts of analysts and M.B.A. students are more accurate only when participants are required to provide separate forecasts for operating cash flows and accruals and the income statement is altered to present the disaggregated cash and accrual components of earnings.
TL;DR: In this article, the authors investigate whether future performance suffers when a firm deviates from an estimated optimal cash level, and they show that one year ahead RNOA and stock returns are decreasing in the level of deviation from the estimated optimal for both firms holding insufficient cash and firms holding excess cash.
Abstract: This paper investigates whether future performance suffers when a firm deviates from an estimated optimal cash level. Results show that one year ahead RNOA and stock returns are decreasing in the level of deviation from an estimated optimal for both firms holding insufficient cash and firms holding excess cash. Investment strategies based on estimated insufficient and excess cash produce positive abnormal returns. Integrating our insufficient/excess cash strategies with an accruals-based strategy indicates that these strategies are complimentary for firms with insufficient cash but not for firms with high excess cash; the accruals anomaly does not hold for firms with high excess cash.
TL;DR: Wang et al. as discussed by the authors conducted an event study using a sample of cash dividend changes from all listed A-share firms in China during the period from 2000 to 2004, and examined whether the dividend-signaling hypothesis holds in China's stock markets.
Abstract: An event study using a sample of cash dividend changes from all listed A-share firms in China during the period from 2000 to 2004 was conducted to investigate the announcement effect of cash dividend changes and examine whether the dividend-signaling hypothesis holds in China's stock markets. The results indicate that the announcement of cash dividend changes has a positive influence on share prices, but only partly support the dividend-signaling hypothesis. The study also found that there is no great dissimilarity between the announcement effects of cash dividend changes for different stock markets in China. However, the announcement effect of cash dividend changes for different sample periods exhibits distinct differences that may have a close connection with the promulgation and execution of two administrative rules. Cross-sectional analysis shows that both cash dividend yield and the ratio of nonfloating shares have explanatory power on the announcement effect of cash dividend changes.
TL;DR: In this article, the authors investigated the relationship between firms' financial constraints and monetary policy for the United Kingdom, using a large panel of UK firms in manufacturing over the period 1970-91.
Abstract: This paper examines the cash flow sensitivity of investment using a panel of UK manufacturing firms to investigate the existence of a balance sheet channel. In addition to examining the impact of cash flow in different subsamples based on company size or financial policy, we investigate the extent to which investment becomes more sensitive to cash flow in periods of monetary tightness by employing a narrative indicator constructed for the United Kingdom. The results indicate that cash flow sensitivity in financially constrained firms is higher during periods of tight monetary policy and that financial constraints weaken with financial market sophistication. to investigate the relationship between firms' financial constraints and monetary policy for the United Kingdom, using a large panel of UK firms in manufacturing over the period 1970-91. We initially establish that cash flow has a different effect on investment in different subsamples depending on company size or financial policy (dividend payouts and share issues as well as leverage), something that is well established in the literature. The main contribution of this paper is an investigation of the extent to which investment becomes even more sensitive to cash flow in periods of monetary tightness. This is an under-researched area, yet one that provides important information about both the dynamic nature of financing constraints and monetary transmission. To this end, we employ a monetary tightness indicator constructed for the United Kingdom using the narrative approach pioneered by Romer and Romer (1989). The second contribution of the paper, therefore, is that this is the first time such an index has been constructed for the United Kingdom and used to test for the balance sheet channel. In the light of the criticisms of the approach used in the literature on financial constraints, a final contribution of the paper is an extensive analysis of the robustness of the results. Our results provide support for the view that, using firm size and firm financial policy to classify companies, financially constrained firms in the United Kingdom display
TL;DR: In this article, a CPM/LOB model for a project of repetitive non-serial activities with a cash flow model was integrated with a GA to maximize the profit at the end of the project under the constraints of available cash.
Abstract: Projects of repetitive non‐serial activities constitute a major category of construction projects which can be scheduled more conveniently using the line of balance (LOB) technique. Generally, scheduling activities such that the expenditures are always in balance with the available cash is a must to devise financially feasible schedules. The objective is to integrate a CPM/LOB model for a project of repetitive non‐serial activities with a cash flow model and utilize the integrated model to devise financially feasible schedules. The genetic algorithms (GAs) technique is employed to maximize the profit at the end of the project under the constraints of available cash. The optimization of the integrated models was demonstrated using an example project of 15 activities carried out at five units. The CPM/LOB model was validated against the results of a dynamic programming model in the literature and further by conducting a sensitivity analysis of the results of the integrated model. Finally, the model offers a...
TL;DR: In this article, transaction cost economics provides a valuable lens for understanding the performance implications of cash holdings because not only does it explicate the benefits and costs of Cash holdings in a single unified theoretical framework, but it further clarifies how environmental uncertainty critically moderates these relationships.
Abstract: While both financial and behavioral theories suggest that cash holdings may be beneficial to R&D-intensive firms, agency theory would suggest that strong monitoring may be needed to ensure that cash holdings are not squandered. We contend that transaction cost economics provides a valuable lens for understanding the performance implications of cash holdings because not only does it explicate the benefits and costs of cash holdings in a single unified theoretical framework, but it further clarifies how environmental uncertainty critically moderates these relationships. Empirical tests on a large sample of US corporations yield strong support for our theory. Copyright © 2009 John Wiley & Sons, Ltd.
TL;DR: In this paper, the authors examined the accuracy of these procedures by measuring errors between estimated cash flows and reported cash flows, and showed that these errors are correlated with firm specific characteristics such as sales (firm size), extraordinary items, foreign currency gains and losses, and changes in inventory.
Abstract: Prior research uses mechanical procedures to estimate cash flow data. This study examines the accuracy of these procedures by measuring errors between estimated cash flows and reported cash flows. The results indicate that mechanical rules provide poor estimates for reported cash flows. We also show that the errors between cash flow estimates and reported cash flows can be reduced by adjustments made from footnote disclosures. However, large errors remain, even after adjustments are made from footnote disclosures. These remaining errors are correlated with firm specific characteristics such as sales (firm size), extraordinary items, foreign currency gains and losses, and changes in inventory.
TL;DR: Chandrashekar et al. as discussed by the authors investigated the empirical relationship between the productivity of cash and expected stock returns, and found that the productivity is a highly significant and negative predictor of stock returns.
Abstract: Assuming that firms hold cash to generate rents (NPVs plus growth options), we define the “productivity of cash” as the rents that the firm generates per dollar of cash holdings. We investigate the empirical relationship between the productivity of cash and expected stock returns, and find that the productivity of cash is a highly significant and negative predictor of stock returns. We rationalize this finding as an implication of the inverse relation between the productivity of cash measure and the firm's financial risk. Our evidence suggests that the productivity of cash is a (new) and economically rich factor explaining the cross-section of expected stock returns-one that subsumes details of the firm's financial risk, discount rates, and the composition of the assets generating cash flows. Satyajit Chandrashekar Advanced Research Center State Street Global Advisors 1 Lincoln Street Boston, MA 02111 617-664-9603 satyajit_chandrashekar@ssga.com Ramesh K. S. Rao* McDermott Professor of Finance McCombs School of Business University of Texas at Austin Austin, TX 78712 512-475-8756 ramesh.rao@mccombs.utexas.edu November 1, 2006 Revised March 22, 2007 This version: January 26, 2009 * Corresponding author. The views expressed in this paper are those of the authors and not necessarily those of the institutions they are affiliated with. We are grateful to comments from Michael Clement, Bing Han, Mark Hooker, Hao Jiang, Woochan Kim, Alok Kumar, Ralitsa Petkova, Ehud Ronn, Laura Starks, Sheridan Titman, and the Brownbag participants at McCombs School of Business and participants at the 2007 European Financial Management Association Meetings.
TL;DR: In this paper, the authors provide a framework to study the cash supply chain structure and analyzes it as a closed-loop supply chain, and describe the cash flow management system used by banks in the U.S.
Abstract: The Federal Reserve System of the United States is making changes to its cash recirculation policy to reduce depository institutions' (banks') overuse of its cash processing services. These changes will affect operating policies and costs at many institutions having large cash businesses and, in turn, impact cash transportation and logistics providers. This study provides the framework to study the cash supply chain structure and analyzes it as a closed-loop supply chain. Additionally, it describes the cash flow management system used by banks in the U.S.
TL;DR: The authors analyzed credit line characteristics and changes in cash for a panel of firms over 1996-2006, and found evidence consistent with the economic importance of transactions costs for the management of liquidity and the resulting effects on shareholder value.
Abstract: We analyze credit line characteristics and changes in cash for a panel of firms over 1996-2006, and find evidence consistent with the economic importance of transactions costs for the management of liquidity and the resulting effects on shareholder value. We find that shareholders of financially-unconstrained firms value credit line availability and cash holdings similarly. Financially-constrained firms can increase firm value by increasing cash and credit line debt by the same amount, consistent with the theory of Gamba and Triantis (2007). The results provide strong evidence that transactions costs shape financial policy, and that shareholders benefit from low-fixed-cost access to liquidity.