Showing papers on "Cash flow forecasting published in 2013"
TL;DR: In this paper, a large sample comparison of cash policies in public and private U.S. firms is provided, showing that private firms hold, on average, about half as much cash as public firms do.
Abstract: We provide one of the first large sample comparisons of cash policies in public and private U.S. firms. We first show that despite higher financing frictions, private firms hold, on average, about half as much cash as public firms do. By examining the drivers of cash policies for each group, we are able to attribute the difference to the much higher agency costs in public firms. By combining evidence from across public and private firms as well as within public firms across different qualities of governance, we are able to reconcile existing mixed evidence on the effects of agency problems on cash policies. Specifically, agency problems affect not only the target level of cash, but also how managers react to cash in excess of the target.
436 citations
Book•
29 Nov 2013
TL;DR: In this article, the authors present an economic analysis in the public sector, focusing on the following issues: making economic decisions, engineering costs and cost estimating, present worth analysis, and rate of return analysis.
Abstract: Part 1 Making economic decisions. Part 2 Engineering costs and cost estimating. Part 3 Interest and equivalence. Part 4 More interest formulas. Part 5 Present worth analysis. Part 6 Annual cash flow analysis. Part 7 Rate of return analysis. Part 7a difficulties solving for an interest rate. Part 8 Incremental analysis. Part 9 Other analysis techniques. Part 10 Depreciation. Part 11 Income taxes. Part 12 Replacement analysis. Part 13 Inflation and price change. Part 14 Estimation of future events. Part 15 selection of a minimum attractive rate of return. Part 16 Economic analysis in the public sector. Part 17 Rationing capital among competing projects. Part 18 A further look at rate of return.
308 citations
TL;DR: In this article, the authors explored the hypothesis that the rise in intangible capital is a fundamental driver of the secular trend in US corporate cash holdings over the last decades and developed a new dynamic dynamic model of corporate cash holding with two types of productive assets, tangible and intangible capital.
Abstract: This paper explores the hypothesis that the rise in intangible capital is a fundamental driver of the secular trend in US corporate cash holdings over the last decades. Using a new measure, we show that intangible capital is the most important firm-level determinant of corporate cash holdings. Our measure accounts for almost as much of the secular increase in cash since the 1980s as all other determinants together. We then develop a new dynamic dynamic model of corporate cash holdings with two types of productive assets, tangible and intangible capital. Since only tangible capital can be pledged as collateral, a shift toward greater reliance on intangible capital shrinks the debt capacity of firms and leads them to optimally hold more cash in order to preserve financial flexibility. In the model, firms with growth options tend to hold more cash in anticipation of (S,s)-type adjustments in physical capital because they want to avoid raising costly external finance. We show that this mechanism is quantitatively important, as our model generates cash holdings that are up to an order of magnitude higher than the standard benchmark and in line with their empirical averages for the last two decades. Overall, our results suggest that technological change has contributed significantly to recent changes in corporate liquidity management.
201 citations
TL;DR: In this article, the authors investigate the effect of capital structure and dividend policy on cash holdings in developing countries and compare their results with a control sample from the US and the UK.
192 citations
TL;DR: This article analyzed the extent to which firms adjust financial policies on the margin in response to a credit supply shock and found that firms appear to use the proceeds from the reduction in payout to maintain cash levels and to fund investment, consistent with the view that an exogenous shock to the supply of credit during the financial crisis increased the marginal benefit of cash retention.
Abstract: Using the financial crisis as a natural experiment, we analyze the extent to which firms adjust financial policies on the margin in response to a credit supply shock. We document significant reductions in corporate payouts – both dividends and (to a larger extent) share repurchases - during the 2008-2009 financial crisis. Payout reductions are more likely in firms with higher leverage, more valuable growth options, and lower cash balances – i.e., those more susceptible to the negative consequences of a credit supply shock. Moreover, firms appear to use the proceeds from the reduction in payout to maintain cash levels and to fund investment. These findings are consistent with the view that an exogenous shock to the supply of credit during the financial crisis increased the marginal benefit of cash retention, leading some firms to turn to payout reductions as a substitute form of financing.
164 citations
01 May 2013
TL;DR: In this paper, the impact of good corporate governance, free cash flow, and leverage ratio on earnings management of 14 textile companies listed in Indonesia Stock Exchange, selected using purposive sampling method, during the research period 2007-2011.
Abstract: The aim of this research is to provide empirical evidence on the impact of good corporate governance, free cash flow, and leverage ratio on earnings management. Good corporate governance is measured by audit committee’s size, the proportion of independent commissioners, institutional ownership, and managerial ownership. Discretionary accrual is the proxy of earning management. This research used 14 textile companies listed in Indonesia Stock Exchange, selected using purposive sampling method, during the research period 2007-2011. Data were analyzed using multiple regression method. Based on the result of analysis concluded that all components of good corporate governance (audit committee’s size, the proportion of independent commissioners, institutional ownership, and managerial ownership), have no significant effect on earnings management, while leverage ratio has a significant effect on earnings management, and free cash flow has a negative and significant effect on earnings management. It means that companies with high free cash flow will restrict the practice of earnings management.
114 citations
TL;DR: In this article, the authors jointly investigated the interrelationships among capital structure, free cash flow, diversification and firm performance, and found that debt leverage is an efficient way to reduce free cash flows and enhance firm performance.
107 citations
TL;DR: The authors examined the effect of CEO pensions and deferred compensation on firm cash holdings and the value of cash and found that inside debt tilts managerial incentives toward bondholders and helps balance the competing interests of stockholders and bondholders.
Abstract: We examine the effect of CEO pensions and deferred compensation (inside debt) on firm cash holdings and the value of cash. We document a positive relation between CEO inside debt and firm cash holdings. This positive effect is magnified by firm leverage and mitigated by the presence of financial constraints. We further find that the marginal value of cash to shareholders declines as CEO inside debt increases. Our evidence supports the view that inside debt tilts managerial incentives toward bondholders and helps balance the competing interests of stockholders and bondholders. The evidence also suggests, however, that inside debt can harm shareholder value by encouraging excess cash holdings.
103 citations
TL;DR: In this article, the authors examined the idiosyncratic manager-specific influence on corporate cash holdings and found that older CEOs and CEOs without experience in other industries are more concerned with the precautionary motive of cash and less concerned about the opportunity cost of cash, giving rise to higher cash levels compared to younger CEOs with other industry experience.
87 citations
TL;DR: In this article, the authors show that managers with high excess cash outperform their low excess cash peers by over 2% per year and that managers carrying high excess Cash compensate for the low return on cash by making superior stock selection decisions.
Abstract: Cash holdings of equity mutual funds impose a drag on fund performance but also allow managers to make quick investments in attractive stocks and satisfy outflows without costly fire sales. This paper shows that actively managed equity funds with high excess cash -- that is, with cash holdings in excess of the level predicted by fund attributes -- outperform their low excess cash peers by over 2% per year. Managers carrying high excess cash compensate for the low return on cash by making superior stock selection decisions, whereas less capable managers find excess cash costly and remain more fully invested in equities. Managers of high excess cash funds also proficiently satisfy fund outflows and control fund transaction costs, while low excess cash funds lack flexibility to cover outflows and can suffer from costly fire sales. The empirical evidence suggests that managers carrying excess cash benefit from the flexibility it provides despite the costs of holding cash.
79 citations
TL;DR: In this article, the effect of firm characteristics and governance mechanisms on cash holdings for a sample of UK SMEs was analyzed, and it was shown that internal governance mechanisms are more effective for SMEs with high growth investment opportunities, while external governance mechanisms, such as capital market monitoring, are less effective for firms with low-growth investment opportunities.
Abstract: This study analyses the effect of firm characteristics and governance mechanisms on cash holdings for a sample of UK SMEs. The results show that UK SMEs with greater cash flow volatility and institutional investors hold more cash; whereas levered and dividend paying SMEs with non-executive ownership hold less cash. We also find that ownership structure is significant only in explaining the cash holdings for firms with high growth investment opportunities, and leverage is only significant in explaining the cash held by firms with low growth investment opportunities. Our findings suggest that internal governance mechanisms are more effective for SMEs with high growth investment opportunities, while external governance mechanisms, such as capital market monitoring, are more effective for firms with low growth investment opportunities.
TL;DR: This paper analyzed why households hold sizeable shares of their assets in cash at home rather than at banks and showed that cash preferences cannot be fully explained by whether people are banked or unbanked.
Abstract: The paper analyzes why households hold sizeable shares of their assets in cash at home rather than at banks – a phenomenon that is widespread in many economies but for which information is scarce. Using survey data from ten Central, Eastern and Southeastern European countries, I document the relevance of this behavior and show that cash preferences cannot be fully explained by whether people are banked or unbanked. The analysis reveals that a lack of trust in banks, memories of past banking crises and weak tax enforcement are important factors. Moreover, cash preferences are stronger in dollarized economies where a “safe” foreign currency serves as a store of value.
TL;DR: The authors used a dynamic cash management model in which firms face competitive pressure to show that product market competition increases the cash holdings as well as the size and frequency of equity issues of financially constrained firms.
Abstract: We use a dynamic cash management model in which firms face competitive pressure to show that product market competition increases the cash holdings as well as the size and frequency of equity issues of financially constrained firms We test these predictions on Compustat firms for the period 1980-2007 and show that product market competition has first order effects on the cash management and financing decisions of constrained firms, in ways consistent with our theory Also consistent with the model, we find that unconstrained firms' cash holdings and financing decisions are not systematically related to product market competition Finally, we show that the time trend in cash holdings documented by Bates, Kahle and Stulz (2009) can be at least partly attributed to a competition effect
TL;DR: The authors showed that positive consumer attitude toward a firm's products alleviates financial frictions and provides additional net debt capacity, as measured by higher leverage and lower cash holdings, by using a proprietary database of consumer brand evaluation.
Abstract: This paper demonstrates that intangible assets play an important role in financial policy. Using a proprietary database of consumer brand evaluation, I show that positive consumer attitude toward a firm’s products alleviates financial frictions and provides additional net debt capacity, as measured by higher leverage and lower cash holdings. Brand perception affects financial policy through reducing overall firm riskiness, as strong consumer evaluations translate into lower future cash flow volatility as well as higher credit ratings for potentially volatile firms. The impact of brand is stronger among small firms, contradicting a number of reverse causality and omitted variables explanations.
TL;DR: In this article, the authors argue that one factor responsible for the decline of the accruals anomaly is the increasing incidence of analysts' cash flow forecasts that provides markets with forecasts of future accrual.
Abstract: The accruals anomaly, demonstrated by Sloan (1996), generated significant excess returns consistently for over four decades until 2002, but has apparently weakened in the subsequent period. In this paper, I argue that one factor responsible for this decline is the increasing incidence of analysts’ cash flow forecasts that provides markets with forecasts of future accruals. The negative relationship between accruals and future returns is significantly weaker in the presence of cash flow forecasts. This anomalous relationship becomes weaker with the initiation cash flow forecasts but continues after cash flow forecasts are terminated. Further, the mitigating effect of cash flow forecasts is greater for forecasts that are more accurate. The results are incremental to explanations based on the improved accrual quality, reduced manipulation of special items and restructuring charges and greater investment in accruals strategies by hedge funds and highlight the increasing importance of analysts’ cash flow forecasts in the appropriate valuation of stocks.
TL;DR: In this article, the authors investigate the impact of multiple large shareholders on the valuation of cash holdings of firms. And they find that the presence of large shareholders enhances the valuation and is positively associated with an even distribution of blockholders' voting rights.
Abstract: This paper investigates the governance role of multiple large shareholders (MLS, henceforth), as evidenced by their impact on the valuation of cash holdings. For a sample of 2,723 firms from 22 countries, we find that the presence of MLS enhances the valuation of firms’ cash holdings. In particular, we show that the valuation of cash is positively associated with an even distribution of blockholders’ voting rights and with higher contestability of the largest shareholder’s control. We also show that the impact of MLS on the valuation of cash holdings is more pronounced for family-controlled firms, consistent with investors perceiving family owners as associated with greater expropriation risk. Overall, our results contribute to the literature on corporate governance by showing that MLS improve internal monitoring and moderate the agency costs of firms’ cash holdings.
TL;DR: This article found that the average abnormal cash holdings of U.S. firms after the financial crisis amount to 10% of their total stock holdings, which represents an 87% increase in abnormal stock holdings from before the crisis.
Abstract: Defining normal cash holdings as the holdings a firm with the same characteristics would have had in the late 1990s, we find that the average abnormal cash holdings of U.S. firms after the financial crisis amount to 10% of cash holdings, which represents an 87% increase in abnormal cash holdings from before the crisis. The increase in abnormal cash holdings of U.S. firms is concentrated among highly profitable firms. Strikingly, abnormal cash holdings do not increase more for U.S. firms than for firms in advanced countries from before the crisis to after the crisis. Though abnormal cash holdings of U.S. multinational firms increase sharply in the early 2000s while cash holdings of purely domestic firms do not, there is no increase in abnormal cash holdings by U.S. multinational firms from before the crisis to after. Further evidence shows that the tax explanation for the cash holdings of U.S. multinational firms cannot explain the large abnormal holdings of these firms. In sum, while the high cash holdings of U.S. firms before the crisis are a U.S.-specific puzzle, the increase in cash holdings of U.S. firms from before the crisis to after is not.
Posted Content•
TL;DR: U.S. corporations are holding record-high amounts of cash due to uncertainty about future taxes and the reality of today’s tax rules as mentioned in this paper, which has led to the rise of research and development; this sort of work requires access to high levels of cash.
Abstract: U.S. corporations are holding record-high amounts of cash. One reason has to do with taxes—both the uncertainty about future taxes and the reality of today’s tax rules. The second reason has to do with the rise of research and development; because of its uncertain nature, this sort of work requires access to high levels of cash.
TL;DR: In this article, the authors examine the sophistication of analysts' cash flow forecasts to better understand what accrual adjustments, if any, analysts make when forecasting cash flows, and they find that the majority of these analysts include explicit adjustments for working capital and other accruals in their forecast.
Abstract: We examine the sophistication of analysts' cash flow forecasts to better understand what accrual adjustments, if any, analysts make when forecasting cash flows. As a preliminary step, we first demonstrate that prior empirical tests used to evaluate the sophistication of analysts' cash flow forecasts are not diagnostic. We then present three sets of evidence to triangulate our conclusion that analysts' cash flow forecasts incorporate meaningful accrual adjustments. First, we review a stratified random sample of 90 analyst reports and find that the majority of these analysts include explicit adjustments for working capital and other accruals in their cash flow forecasts. Second, using a large sample of analysts' cash flow forecasts from 1993–2008, we find that these forecasts outperform time-series cash flow forecasts in correctly predicting the sign and magnitude of accruals. Finally, we find a significant market reaction to analysts' cash flow forecast revisions, suggesting that investors find these revisions informative. Collectively, our findings demonstrate that analysts' cash flow forecasts are not simply naive extensions of their own earnings forecasts, but that they reflect meaningful and useful accrual adjustments. These findings are relevant to researchers who examine analysts' cash flow forecasts in a variety of settings, and to investors and practitioners who employ these forecasts for valuation purposes.
TL;DR: In this paper, the authors examine whether European investment analysts prefer cash flow based valuation models over accrual based models, how accurate valuation models are and whether the use of cash flow-based models (with or without accruality based models) improve forecast accuracy.
TL;DR: This paper considers the problem of finding the optimal operational and financial decisions by integrating the cash management and inventory lot sizing problems and proposes a solution procedure and results indicate that the optimal order quantity decreases as the retailer's return on cash increases.
TL;DR: In this paper, the authors investigated the role of cash conversion cycle in enhancing return on assets and equity of the companies and to measure the impact of Cash conversion cycle on profitability of the manufacturing companies.
Abstract: Cash conversion cycle is one of the most widely used measures to evaluate and measure the risks and returns associated to liquidity management Since every corporate organization is extremely concerned about how to sustain and improve profitability, hence they have to keep an eye on the factors affecting the profitability. The present study is concerned about evaluating how cash conversion cycle affects the profitability of manufacturing sector organizations listed at Karachi stock exchange of Pakistan. The specific research objective of the study is to investigate the existing literature on the role of cash conversion cycle in enhancing return on assets and equity of the companies and to measure the impact of cash conversion cycle on profitability of the manufacturing companies. The results of the study will be helpful for academics and industry experts for policy making and control purposes. The study takes return on equity and return on assets as measures of profitability to represent dependent variables. Firm size and debt ratio are taken as control variables. Cash conversion cycle is considered as independent or explanatory variable. Study takes into consideration 5 years financial statements data starting from 2007 to 2011. Results showed that manufacturing companies are having low average return on asset and high average return on equity with reasonable average cash conversion cycle. Regression results after adjusting for heteroskedasticity of data to minimize the effects of outliers, showed that cash conversion cycle is having significantly inverse association with both return on assets and equity indicating that lesser the cash conversion cycle greater would be the profitability measured through return on assets and equity. Hence the receivable collection period and inventory selling period must be reduced along with the extension of payment period to increase the profitability of manufacturing sector organizations. The study suggested that manufacturing companies are required to well estimate and evaluate the cash flows of the business, to well identify the long run and short run cash inflows and outflows to timely sort out the cash
TL;DR: In this article, the authors find that firms increase their cash holdings and save more cash from their cash flows to mitigate refinancing risk caused by shorter maturity debt, and that larger cash reserves help to mitigate underinvestment problems resulting from refinancing risks.
Abstract: We find that to mitigate refinancing risk caused by shorter maturity debt, firms increase their cash holdings and save more cash from their cash flows. We also document that the maturity of U.S. firms’ long-term debt has markedly shortened over the 1980-2008 period and that this shortening explains a large fraction of the documented increase in the cash holdings of U.S. firms over time. Consistent with the inference that cash reserves are particularly valuable for firms with shorter maturity debt, we document that the market value of a dollar of cash is higher for such firms and that larger cash reserves help to mitigate underinvestment problems resulting from refinancing risk. Also, we find that our results are more pronounced during periods when credit market conditions are less strong and refinancing risk is consequently higher. Overall, our findings imply that refinancing risk is a key determinant of corporate cash holdings and they provide insights on the interdependence of a firm’s financial policy decisions.
TL;DR: In this paper, the authors examine if cash stockpiles fuel cash acquisitions by studying the method of payment decision for cash-rich firms and find that cash rich firms are 23% less likely to make cash bids than stock bids, relative to firms that are not cash rich.
TL;DR: In this paper, the authors show that disaggregating operating cash flow into its components enhances the predictive ability of aggregate operating flow in forecasting future cash flows, and that cash received from customers and cash paid to suppliers and employees complement each other in enhancing the overall predictive ability.
TL;DR: In this article, the authors examine how legal protection of creditors affects the value of cash across countries and find that marginal investment is more valuable for firms in countries with weak creditor rights.
Patent•
22 Feb 2013TL;DR: In this paper, a cash flow management system is provided within a host system for facilitating cash flow Management for businesses, which includes an electronic billing and invoicing computing system enabling generation and transmission of electronic bills based on business invoices and for displaying the generated bills for payment and an integrated receivables and reconciliation system receiving notification of received payments and for matching received payments with the generated invosices.
Abstract: A cash flow management system is provided within a host system for facilitating cash flow management for businesses. The cash flow management system includes an electronic billing and invoicing computing system enabling generation and transmission of electronic bills based on business invoices and for displaying the generated bills for payment and an integrated receivables and reconciliation system receiving notification of received payments and for matching received payments with the generated invoices. The system additionally includes a communication interface for allowing the cash flow management system to communicate with multiple financial management systems accessible to the host enterprise, the systems including at least an accounting system, the integrated receivables management system receiving information from the financial management systems within the host system to facilitate management of cash flow for the businesses using the cash flow management system for electronic billing.
TL;DR: In this article, the authors examined if there has been a change in the value relevance of direct cash flow components since the adoption of International Financial Reporting Standards (IFRS) in Australia.
Abstract: This study examines if there has been a change in the value relevance of direct cash flow components since the adoption of International Financial Reporting Standards (IFRS) in Australia. Our results show that for both industrial and extractive firms direct cash flow statements are value relevant under Australian Generally Accepted Accounting Principles (AGAAP) and remain so after the adoption of IFRS. In addition, for industrial firms there is a significant increase in the value relevance of direct cash flows after IFRS, along with an increase in the value relevance of accruals. These results are consistent with the proposition that direct cash flows play a reinforcing role that complements the more complex IFRS accounts. Consequently, if the International Accounting Standards Board (IASB) were to mandate direct cash flow statements it would, in all likelihood, provide users of accounts with a valuable incremental source of hard transaction information.
TL;DR: The authors empirically investigated the value shareholders place on excess cash holdings and how shareholders' valuation of cash holdings is associated with financial constraints, firm growth, cash-flow uncertainty and product market competition for Australian firms from 1990 to 2007.
Abstract: This study empirically investigates the value shareholders place on excess cash holdings and how shareholders’ valuation of cash holdings is associated with financial constraints, firm growth, cash-flow uncertainty and product market competition for Australian firms from 1990 to 2007. Our results indicate that the marginal value of cash holdings to shareholders declines with larger cash holdings and higher leverage. However, firms that are more financially constrained, that have higher growth rates and that face greater uncertainty exhibit a higher marginal value of cash holdings. These findings are consistent with the explanation that excess cash holdings are not necessarily detrimental to firm value. Firms with costly external financing and that also save more cash for current operating and future investing needs find that the market values these cash hoarding policies favourably. Finally, there is limited evidence of an association between various corporate governance measures and the value of cash holdings for a shorter sample period.
TL;DR: This article examined whether the components of accruals and operating cash flows improve the predictive ability of earnings for forecasting future cash flows and showed that accrual components and operating flow components together are more useful than earnings.
Abstract: We examine whether the components of accruals and operating cash flows improve the predictive ability of earnings for forecasting future cash flows. Unlike most previous studies, we avoid data estimation errors and sample self-selection bias because we exploit data from Australia where reporting of actual cash flow components had been mandatory since 1992. We show that accrual components and operating cash flow components together are more useful than (i) earnings, (ii) operating cash flows and total accruals and (iii) the combination of operating cash flows with accrual components in forecasting future cash flows. These results are robust to several contextual factors, including the length of the operating cash cycle, industry membership, firm profitability and firm size.