Showing papers on "Cash flow forecasting published in 2014"
TL;DR: In this paper, the authors estimate a dynamic model of finance and investment with three mechanisms that misalign managerial and shareholder incentives: limited managerial ownership of the firm, compensation based on firm size, and managerial per-quisite consumption.
Abstract: Which agency problems affect corporate cash policy? To answer this question, we estimate a dynamic model of finance and investment with three mechanisms that misalign managerial and shareholder incentives: limited managerial ownership of the firm, compensation based on firm size, and managerial perquisite consumption. We find that perquisite consumption critically impacts cash policy. Size-based compensation also matters, but less. Firms with lower blockholder and institutional ownership have higher managerial perquisite consumption, low managerial ownership is a key factor in the secular upward trend in cash holdings, and agency plays little role in small firms' substantial cash holdings.
217 citations
TL;DR: This paper used the countervailing forces embodied in these two theories to hypothesize and test a quadratic functional relationship of returns to cash measured by Tobin's q. Tests for both of these hypotheses are positive and show that return to cash continue to increase far beyond transactional needs.
Abstract: Academics, politicians, and journalists are often highly critical of U.S. firms for holding too much cash. Cash holdings are stockpiled free-cash flow and incur substantial opportunity costs from the perspectives of economics. However, behavioral theory highlights the benefits of cash holdings as fungible slack resources facilitating adaptive advantages. We use the countervailing forces embodied in these two theories to hypothesize and test a quadratic functional relationship of returns to cash measured by Tobin's q. We also build and test a related novel hypothesis of scale-dependent returns to cash based on the competitive strategy concept of strategic deterrence. Tests for both of these hypotheses are positive and show that returns to cash continue to increase far beyond transactional needs. Copyright © 2013 John Wiley & Sons, Ltd.
125 citations
TL;DR: In this article, the authors investigate whether managers use classification shifting when their ability to use other forms of earnings management is constrained, and they find that when AEM is constrained by low accounting system flexibility and the provision of a cash flow forecast, managers are more likely to use Classification shifting.
Abstract: Prior literature has investigated three forms of earnings management: real earnings management (REM), accruals earnings management (AEM) and classification shifting. Managers make trade-off decisions among these methods based on the costs, constraints and timing of each strategy. This study investigates whether managers use classification shifting when their ability to use other forms of earnings management is constrained. We find that when REM is constrained by poor financial condition, high levels of institutional ownership and low industry market share, managers are more likely to use classification shifting. Further, we find that when AEM is constrained by low accounting system flexibility and the provision of a cash flow forecast, managers are more likely to use classification shifting. In addition, when we limit our sample to firms that are most likely to have manipulated earnings, we continue to find support for constraints of both REM and AEM leading to higher levels of classification shifting. We also find support for the hypothesis that the timing of each earnings management strategy influences managers� trade-off decision. Our results indicate that managers use classification shifting as substitute form of earnings management for both AEM and REM.
115 citations
TL;DR: In this paper, the authors examined the relationship between changes in cash flow measures and changes in firm financial performance using a longitudinal sample of firm data and found that both reductions in Accounts Receivables and reductions in Inventory (measured as Days of Inventory Outstanding [DIO]) relate to improvements that persist for several quarters.
106 citations
TL;DR: Li et al. as mentioned in this paper use China as a laboratory to test the effect of government quality on cash holdings and find that firms hold less cash when local government quality is high, which is not consistent with the state expropriation argument, but supports the financial constraint mitigation argument.
Abstract: We use China as a laboratory to test the effect of government quality on cash holdings. We build on, and extend, the existing literature on government expropriation and its interaction with firm-level agency problems by proposing a financial constraint mitigation argument. Wefind that firms hold less cash when local government quality is high, which is not consistent with the state expropriation argument, but supports the financial constraint mitigation argument. A good government lowers the investment sensitivity to cash flows and cash sensitivity to cash flows, decreases cash holdings more significantly in private firms, and improves access to bankand trade credit financing. We also test and find support for Stulz’s (2005) model on theinteraction between government and firm agency problems.
105 citations
TL;DR: In this paper, the authors analyzed the factors that might explain the level of corporate cash holdings in a broad sample of Turkish-listed nonfinancial firms over the period 1997 to 2011.
Abstract: This study analyses the factors that might explain the level of corporate cash holdings in a broad sample of Turkish-listed nonfinancial firms over the period 1997 to 2011. The empirical results reveal that, on average, Turkish firms hold 9.1% of their total assets as cash and cash equivalents. There is a steadily increasing trend in cash holding across the years. Both the system GMM and the difference GMM regression results are consistent; almost exactly the same variables are significant and going in the same direction. The findings indicate that the previous year’s cash holding is positive and significant determinant at the current year’s cash level, suggesting that these firms have a targeted cash level. Furthermore, the results reveal that cash flow and growth opportunities have positive and significant impact on the cash level. However, the amount of capital expenditures, liquid assets used as cash substitute, the degree of tangibility of assets, financial debt ratio and leverage have negative and s...
88 citations
TL;DR: The authors decompose cash flow into a transitory and a permanent component and focus on the allocation of the transitory component, which by construction contains little information about future growth opportunities, and find that more financially constrained firms allocate more transitory cash flow to cash savings and direct less toward investment than do less constrained firms, consistent with constrained firms accumulating liquidity to buffer against future financial constraints.
Abstract: We study how firms allocate cash flow by estimating the cash-flow sensitivities of various uses of cash flow. We decompose cash flow into a transitory and a permanent component and focus on the allocation of the transitory component, which by construction contains little information about future growth opportunities. We find that more financially constrained firms allocate more transitory cash flow to cash savings and direct less toward investment than do less constrained firms, consistent with constrained firms accumulating liquidity to buffer against future financial constraints. We also illustrate several methodological advantages of our approach over alternative methods in previous studies.
85 citations
Book•
01 Jan 2014
TL;DR: The scope of farm management is discussed in this paper, where a business plan, a game plan, and a strategy are presented for the management of a farm business life cycle, as well as a strategy for strategy implementation.
Abstract: The scope of farm management -- The farming environment -- The functions of management -- The decision process -- The farm business life cycle -- A business plan -- Strategic management -- A game plan -- Crafting a strategy -- Strategic planning -- Strategy implementation -- Strategic control -- Marketing plan -- Marketing plan components -- Historical price patterns -- General price forecasting methods -- Marketing control -- Budgeting -- General budget terminology -- Types of budgets -- Microeconomic principles for management -- Budget development -- Production and operations management -- Process mapping -- Improving the current process -- Enterprise selection -- Input supply management -- Scheduling operations -- Quality management and control -- Quality defined -- The costs of quality -- Quality management -- Process control -- Tools for process improvement -- Financial analysis -- Understanding financial statements -- Measures of financial position and performance -- Initial analysis -- Diagnostic analysis -- Financial management -- Sources and uses of capital -- Calculating loan payments -- Estimating the cost of credit -- Cash flow management -- Financial control -- Investment analysis -- The time value of money -- Investment analysis (a.k.a. capital budgeting) -- Land purchase and rental -- Purchasing land -- Land rental -- Risk management -- Sources of risk -- Managing risk -- Crop insurance -- Making risky decisions -- Scenarios for management planning -- Production contract evaluation -- Types of production contracts -- Evaluating production contracts -- A production contract checklist -- Staffing and organization -- Human and employee needs -- Human resource management -- Business organization -- The future farm manager -- Farmers' responses -- Concluding comments.
72 citations
TL;DR: Wang et al. as mentioned in this paper investigated the determinants of cash holdings in the period 1999-2009 in China and found that firms with more financial constrains and with more investment opportunities tend to hold more cash.
Abstract: This study investigates the determinants of cash holdings in the period 1999–2009 in China. The sample period covers the time of financial crisis. The focus in this study is on how firm characteristics, especially financial constraints and investment options, are associated with cash holdings. The findings show that:
Compared to “normal” times, Chinese firms tend to increase their cash holdings during the financial crisis.
In general, the firms with more financial constrains, and with more investment opportunities, tend to hold more cash.
Further, the firms with lower leverage, less net working capital (NWC), and lower capital expenditures, are more likely to increase their cash holdings as well. Likewise, those firms tend to save more cash from cash flow.
The evidence suggests that Chinese firms are precautious with their cash holdings.
70 citations
TL;DR: The authors study how firms engaged in both R&D and fixed investment manage liquidity and adjust real investment during the recent financial crisis, and find evidence that firms use cash to buffer fixed investment.
Abstract: We study how firms engaged in both R&D and fixed investment manage liquidity and adjust real investment during the recent financial crisis. Among firms with positive R&D expenditures, cuts to fixed investment in the crisis are typically far more severe than cuts to R&D. These firms allocate cash reserves to buffer R&D but do not use cash to protect fixed investment. Some firms appear to go so far as to allow the stock of fixed assets to fall to stabilize R&D. The use of cash holdings and fixed assets to protect R&D is particularly strong among firms most likely to face financing frictions at the start of the crisis. We only find evidence that firms use cash to buffer fixed investment when we expand the sample to include firms with no R&D spending to compete for funds. Our study provides direct evidence on the real effects of liquidity management, highlights a key benefit of precautionary cash reserves, and illustrates the adjustments firms make to navigate a financial crisis.
66 citations
TL;DR: Wang et al. as mentioned in this paper examined the impact of independent directors' cash compensation on firms' financial reporting quality using a sample of Chinese listed companies from 2002 to 2008 and found a positive association between independent director cash compensation and the magnitude of earnings management, which suggests that compensating independent directors with higher cash pay compromises their independence and reduces their effectiveness in financial reporting oversight.
TL;DR: In this paper, the authors provide a large sample study to examine how firm-level characteristics and national-level institutions affect cash balances in privately held and publicly traded firms and investigate whether the determinants of cash holdings for both types of firms are similar.
TL;DR: In this paper, the authors examine whether managers postpone the recognition of goodwill impairment by manipulating cash flows and the consequences of such a strategy on future performance and find that this real activities manipulation is detrimental to future performance.
Abstract: We examine whether managers postpone the recognition of goodwill impairment by manipulating cash flows and the consequences of such a strategy on future performance. According to SFAS 142, an impairment loss must be recognized if the reporting unit’s total fair value to which goodwill has been allocated is less than its book value. A growing body of empirical evidence shows that managers delay the recognition of goodwill impairment in accounting books. However, past literature is silent on how managers convince various gatekeepers (e.g., auditors, financial analysts) that recognizing an impairment loss is unnecessary although it seems economically justified. SFAS142 requires managers to forecast future cash flows to justify the decision to recognize or not an impairment loss. Therefore we predict that managers manipulate upward current cash flows to support their choice to avoid reporting an impairment loss. We also test whether or not this real earnings management is detrimental to future performance. Based on a sample of US firms over the 2003-2011 period, we document that firms suspect of postponing goodwill impairment losses exhibit significantly positive discretionary cash flows compared to various control groups. We also find that this real activities manipulation is detrimental to future performance.
TL;DR: In this article, the importance of short-term financial decisions to a company's value is considered by testing whether an extra euro invested in cash or in net working capital is valued at less than one euro.
Abstract: The importance of short-term financial decisions to a company’s value is considered in this paper by testing whether an extra euro invested in cash or in net working capital is valued at less than one euro. By running panel data regressions, the presented evidence proves that shareholders undervalue cash holdings and net working capital. The results of this paper alert management not to underestimate the importance of cash holdings and working capital management; moreover, the results encourage investors to follow a company’s actions in this area to maximise their returns on investment.
TL;DR: In this paper, the authors investigated the effect of the separation of control and ownership on the value of cash holdings in publicly listed French firms and found that excess cash contributes less to firm value when minority shareholders are more likely to be expropriated by controlling shareholders.
TL;DR: In this paper, the authors provide new evidence that firms under weak governance regimes hold less cash than firms operating under strong governance, contrary to previous literature, and they also establish that there are two independent effects for the de jure and de facto aspects of governance that protect minority shareholders.
Abstract: We provide new evidence that firms under weak governance regimes hold less cash than firms operating under strong governance, contrary to previous literature. Our findings also establish that there are two independent effects for the de jure and de facto aspects of governance that protect minority shareholders. Consistent with managerial empire building prediction, our study reveals that firms deplete their excess cash by overinvesting and this effect is exacerbated in countries with weak governance. The excess cash depletion has an adverse impact on firm performance, more so in countries with weak investor protection which is in support of the agency costs explanation.
TL;DR: In this paper, the authors defined a model of cash in-flows on current accounts considering, besides dirty money to be laundered, also the legal motivations to deposit cash and the role of the shadow economy and found that the average amount of cash laundered in Italy is around 6% of GDP.
Abstract: This study provides an answer to the question of how much cash deposited via a financial institution can be traced back to criminal activities, by developing a new approach to measure money laundering and proposing an application to Italy. We define a model of cash in-flows on current accounts considering, besides “dirty money” to be laundered, also the legal motivations to deposit cash and the role of the shadow economy. We find that the average amount of cash laundered in Italy is around 6% of GDP. These findings are coherent with estimates of the nonobserved economy obtained in previous studies.
TL;DR: In this paper, the authors examined the impact of cash holdings on firm value before and during the 2008 financial crisis and showed that the equity market places a higher value on corporate cash holdings during the financial crisis.
Abstract: This study examines the impact of cash holdings on firm value before and during the 2008 financial crisis. In answering this question, our analysis assesses the conditioning effect of financial constraints and corporate governance. In our core finding we show that the equity market places a higher value on corporate cash holdings during the financial crisis. Also, there is some evidence to show cash holdings is more valuable to constrained firms, compared to unconstrained firms. The value impact is also more pronounced during the crisis. The triple-interaction of cash with constraint and crisis effects show a strong negative effect. That is, the crisis value effect for constrained firms is less than that of unconstrained firms. Further, while the governance effect on corporate cash holdings is unclear in the pre-crisis period, it becomes more pronounced and more positive during the financial crisis. Finally, the triple-interaction of excess cash with governance and constraint effects generally show a positive effect, suggesting that the positive governance effect on corporate cash holdings becomes more pronounced for firms that are financially constrained.
TL;DR: In this article, a model has been established by integrating analytic hierarchy process and simulation to examine the impact of various factors on cash flow, and data on the selected factors have been collected through questionnaires from various agencies in North America and Chin...
Abstract: Purpose – Construction projects are well known for their complexity and ambiguity. These projects carry out higher risk than traditional ones because they entail high capital outlays and intricate site conditions. Poor financial management of these projects may lead to bankruptcy; therefore, effective cash flow management is essential. Although the peculiar characteristics of construction projects, the accuracy of cash flow forecasting has been a long lasting problem. The paper aims to discuss these issues. Design/methodology/approach – Many unforeseen factors affect the cash flow forecasting of construction projects. Therefore, the objective of the presented research in this paper is to examine the impact of these factors on contractor's cash flow. A model has been established by integrating analytic hierarchy process and simulation to examine the impact of various factors on cash flow. Data on the selected factors have been collected through questionnaires from various agencies in North America and Chin...
Journal Article•
TL;DR: In this paper, an empirical study explores the effect of corporate governance on managerial cash holding decisions and concludes that cash flow is the only variable which is statistically significant and positively related to cash holdings.
Abstract: Basing on agency theory this empirical study explores the effect of corporate governance on managerial cash holding decisions. For the sake of a testable propositions concerning the determinants of corporate cash holdings, different theories of corporate cash holdings are reviewed (pecking order theory, trade off theory and free cash flow theory).The investigation is performed using panel data procedure for a sample of 138 firms listed on Karachi Stock Exchange during 2008-12.The results suggest that cash flow is the only variable which is statistically significant and positively related to cash holdings. Alternatively, liquidity, leverage, bank borrowing variability of cash flow is significantly and negatively related to cash holdings. Dividend, market-to-book ratio and ratio of non-executive to total directors are positively whereas firm size family dummy and CEO duality are negatively related to cash holdings but the relationships are insignificant. In particular managerial ownership (MAN) and MAN3 is negative but significant however MAN2 is positively related to cash holdings. These variations in sings indicate the non-linear relationship between managerial ownership and cash holdings. To author knowledge this is first study that explores corporate governance as an important determinant of cash holding.
TL;DR: In this article, a nonparametric Kruskal-Wallis test is carried out to analyze industrial and time differences in cash holdings and the ordinary least square (OLS) regression technique is used to understand the relationships between various attributes with the level of cash holdings.
Abstract: Purpose – The purpose of this paper is to understand the motives behind the levels of cash holdings and the theory that may be able to explain why these firms hold so much cash. Design/methodology/approach – Annual financial data and stock prices of 192 firms from six different sectors on the Bursa Malaysia are collected for the period 2000-2007. Analysis using the non-parametric Kruskal–Wallis test is carried out to analyze industrial and time differences in cash holdings. The ordinary least square (OLS) regression technique is used to understand the relationships between various attributes with the level of cash holdings. Due to issues of endogeneity, the generalized method of moments method is also applied. Findings – Significant differences are found to exist in the level of cash holdings between firms and across time. It is found that firms adjust to a target level of cash holdings, although this is done relatively slowly. Also, significance of firm characteristics and their relationships with cash h...
Abstract: Using a database of more than 180,000 private companies from 2000 to 2009, we find that the benefits of holding more cash vary substantially with a firm’s size and the conditions it faces. Cash holdings matter most for small firms: When there are negative shocks to industry or macroeconomic conditions, a small firm’s cash holdings are positively associated with changes in its sales and assets. Cash is less important for other conditions. Differences in the benefits of cash holdings between large and small firms are traced to a firm’s ability – and willingness – to increase leverage when there is a cash shortfall.
TL;DR: In this article, the effects of banking deregulation on the cash policies of non-bank firms in the United States were investigated. And they found that the negative relation between intrastate banking deregulation and corporate cash holdings was driven by financially constrained firms, especially by constrained firms with low hedging needs.
Abstract: This paper tests the effects of banking deregulation on the cash policies of nonbanking firms in the United States. We document a significant and negative relation between intrastate banking deregulation and corporate cash holdings. We show that the negative relation is driven by financially constrained firms, especially by constrained firms with low hedging needs. Further, we construct indexes measuring the intensity of bank consolidation in local markets. We find that the intensity of in-market bank mergers is negatively related to corporate cash holdings. However, in-market bank mergers in highly concentrated markets tend to be positively related to corporate cash holdings.
TL;DR: In this paper, a proxy of managerial optimism following Malmendier and Tate (2005a) was introduced to show the impact of CEOs' optimism in the relationship between investment and internal cash flow.
TL;DR: In this paper, a simple inventory model that predicts that the level of cash demand falls with an increase in card acceptance is proposed. But the model assumes that the lack of card acceptance at the point of sale is a key reason why cash continues to play an important role.
Abstract: The use of payment cards, either debit or credit, is becoming more and more widespread in developed economies. Nevertheless, the use of cash remains significant. We hypothesize that the lack of card acceptance at the point of sale is a key reason why cash continues to play an important role. We formulate a simple inventory model that predicts that the level of cash demand falls with an increase in card acceptance. We use detailed payment diary data from Austrian and Canadian consumers to test this model while accounting for the endogeneity of acceptance. Our results confirm that card acceptance exerts a substantial impact on the demand for cash. The estimate of the consumption elasticity (0.23 and 0.11 for Austria and Canada, respectively) is smaller than that predicted by the classic Baumol-Tobin inventory model (0.5). We conduct counterfactual experiments and quantify the effect of increased card acceptance on the demand for cash. Acceptance reduces the level of cash demand as well as its consumption elasticity.
TL;DR: In this article, the authors examined the relationship between cash holdings and the CPI and found that the relationship is reversed when the CPI reaches a certain level, and that there is also a U-shaped relationship between operating cycle and cash holdings.
Abstract: A corporate cash-holding strategy is a trade-off between the costs and benefits of holding cash. At the macrolevel, firms are inclined to adjust and optimize their cash-holding strategies in response to changes in purchasing power due to inflation. At the microlevel, the operating cycle, which indicates the speed and turnover of corporate cash flow, also influences the corporate cash-holding strategy. Firms flexibly adjust their cash-holding strategies in response to changes in the internal and external environment, which is referred to as the cash adjustment strategy. We examine these predicted relationships using a sample of listed firms in China’s stock market over the 1998–2009 period. Consistent with our predictions, the empirical results indicate a significant negative association between cash holdings and the CPI, but the relationship is reversed when the CPI reaches a certain level. There is also a U-shaped relationship between operating cycle and cash holdings, and this relationship is similarly influenced by changes in the inflation level. In examining the macroeconomic environment and microlevel firm-specific characteristics simultaneously, our findings supplement the literature on firms’ cash-holding strategies and provide theoretical and practical implications.
TL;DR: This article found evidence of a positive relation between creditor rights and the level of corporate cash holdings and found that the excess cash motivated by creditor rights has a significant negative impact on firm value.
13 Aug 2014
TL;DR: In this article, the focus of a review is on financial management in small-to-medium enterprises (SMEs), in particular working capital and cash flow management, and the relationship between financial management and growth within SMEs.
Abstract: This is the first of a series of reviews for Small Enterprise Research that cover recently published research in the field of small business management and entrepreneurship. The focus of this review is on financial management in small to medium enterprises (SMEs), in particular working capital and cash flow management. A total of 18 papers published in the past 12 months are reviewed summarising their methodology, findings and implications for research, education, policy and practice. The papers are grouped into four categories. The first are those that provide an overall examination of the nature of SME financing. The second are those that focus on the relationship between working capital management and profitability in SMEs. The third group encompass studies of how owner-managers undertake the management of working capital, specifically in developing economies. The fourth group examines the relationship between financial management and growth within SMEs.
TL;DR: The authors found that investors place a lower value on an incremental dollar of cash when firms have higher levels of foreign cash holdings, and that this effect is associated with cash held in tax haven countries, but is not related to money held in countries subject to political instability, corruption, or weak legal protections.
Abstract: U.S. multinationals hold cash balances across multiple countries with differing business and tax environments. Regulators are concerned that current cash disclosures do not reflect these differences. This study develops an estimate of the location of firms’ cash holdings, validates this estimate with proprietary data, and investigates whether investors differentially value cash holdings based on their location. We find that investors place a lower value on an incremental dollar of cash when firms have higher levels of foreign cash holdings. Further, we find that this effect is associated with cash held in tax haven countries, but is not related to cash held in countries subject to political instability, corruption, or weak legal protections. Our results suggest that a one standard deviation increase in foreign cash held in tax havens (domestic cash holdings) decreases the value of an additional dollar of cash by 15.8 (3.8) cents. This result is stronger when firms have more sophisticated investors. Overall, our findings suggest that investors at least partially estimate the location of cash, determine that cash held in some countries is unlikely to be fully realizable, and discount that cash accordingly.
Journal Article•
TL;DR: In this paper, three simple regression models were used to examine the relationships between cash holdings and firms' profitability using a panel data of 65 non-financial firms listed in Amman Stock Exchange (ASE) during the period from 2000 to 2011.
Abstract: The purpose of this paper is to examine the effect of cash holdings level on firms' profitability. Three simple regression models were used to examine the relationships between cash holdings and firms' profitability using a panel data of 65 non-financial firms listed in Amman Stock Exchange (ASE) during the period from 2000 to 2011. The results showed a positive significant relationship between cash holdings and profitability. This means that a good financial performance of the firm is an outcome of vast corporate cash holdings. This positive relationship reflected the beliefs of Jordanian firms' managers that the absence of effective liquidity management will cause cash shortages and will result in difficulties in paying obligations, which negatively affected the firm's profitability. This study contributes to the practical world. It helps firms in the markets of emerging countries in general and in ASE in particular, manages their liquidity and cash. Furthermore, the study helps firms hold the percentage of cash, which lead to efficient financial performance. This study encourages the future researches to find out the suitable strategies related to cash holdings.