Showing papers on "Cash flow forecasting published in 2017"
TL;DR: In this paper, the authors examined whether integrated report quality (IRQ) is associated with stock liquidity, firm value, expected future cash flows, and cost of capital, and found that IRQ is positively associated with both stock liquidity and firm value.
Abstract: We examine whether integrated report quality (IRQ) is associated with stock liquidity, firm value, expected future cash flows, and cost of capital. Our study is motivated by the recent focus on sustainable capitalism and the global interest shown by firms, investors, and regulators in integrated reporting. We use data from South Africa because it is the only country where integrated reporting is mandatory. We use a measure of IRQ based on proprietary data from EY, which rates these reports as part of its Excellence in Integrated Reporting Awards. We find that IRQ is positively associated with stock liquidity, measured using bid-ask spreads, and firm value, measured using Tobin’s Q. Our results are consistent whether we analyze levels or changes. When we decompose the firm value into an expected future cash flows effect and a cost of capital effect, we find that the positive association between IRQ and firm value is attributable mainly to the cash flows effect, which is consistent with investors revising estimates of future cash flows upward as a result of better understanding the firm’s capitals and strategy or future cash flows increasing because of improved internal decision making. We provide evidence on these two explanations and find it is more likely that our results are attributable to improved decision making by managers than to analysts forecasting future cash flows more accurately.
212 citations
TL;DR: In this article, the authors present a formal model to assess the optimality of industrial firms' investment in noncash, risky financial assets such as corporate debt, equity, and mortgage-backed securities.
Abstract: U.S. industrial firms invest heavily in noncash, risky financial assets such as corporate debt, equity, and mortgage-backed securities. Risky assets represent 40% of firms’ financial portfolios, or 6% of total book assets. We present a formal model to assess the optimality of this behavior. Consistent with the model, risky assets are concentrated in financially unconstrained firms holding large financial portfolios, are held by poorly governed firms, and are discounted by 13% to 22% compared to safe assets. We conclude that this activity represents an unregulated asset management industry of more than $1.5 trillion, questioning the traditional boundaries of nonfinancial firms.
125 citations
TL;DR: In this paper, the authors investigate the liquidity management of firms following the inception of credit default swaps (CDS) markets on their debt, which allow hedging and speculative trading on credit risk to be carried out by creditors and other parties.
104 citations
TL;DR: In this paper, the authors present a global game model of investor runs and identify conditions under which asset managers hoard cash, and find that cash hoarding is the rule rather than the exception.
101 citations
TL;DR: In this article, the authors explore the impact of internal and external corporate governance practices on the decision to hold cash in MENA countries and find that both types of governance practices are important.
93 citations
TL;DR: In this paper, the authors examined whether corporate social responsibility (CSR) performance has an impact on the value of cash holdings and found that investors assign a higher value to cash held by firms that have a high CSR rating.
Abstract: Using a worldwide sample, we examine whether corporate social responsibility (CSR) performance has an impact on the value of cash holdings. We find that investors assign a higher value to cash held by firms that have a high CSR rating. This result is consistent with the idea that CSR policies are a means for managers to act in the shareholders’ interests by mitigating conflicts with stakeholders. Finally, we reveal that CSR performance has a positive impact on the value of cash holdings only for firms which operate in countries where shareholders are well protected from expropriation by managers and in countries where the institutional quality is high.
88 citations
TL;DR: In this article, the authors synthesize arguments from the behavioral theory of the firm, economic perspectives like agency theory, and the value-creation versus value-appropriation literatures to argue that the implications of cash for firm performance are context-specific.
Abstract: Research summary: Cash can create shareholder value when used for adaptation to unfolding contingencies, but can also reduce value when appropriated by other stakeholders. We synthesize arguments from the behavioral theory of the firm, economic perspectives like agency theory, and the value-creation versus value-appropriation literatures to argue that the implications of cash for firm performance are context-specific. Cash is more beneficial for firms operating in highly competitive, research-intensive, or growth-focused industries that are typical of contexts requiring adaptation in the face of uncertainties. Conversely, cash is more detrimental to performance in firms that are poorly governed, diversified, or opaque, as are typical of contexts where stakeholder conflicts, information asymmetries, or power imbalances can encourage value appropriation by other stakeholders.
Managerial summary: Cash can create shareholder value when used for adaptation to unfolding contingencies, but can also reduce value when appropriated by other stakeholders. While cash-rich firms have higher performance on average, with those in the 75th percentile having a market-to-book value 15 percent higher than those in the 25th percentile, we find that the performance benefits of cash depend on the context. Cash is more beneficial for firms operating in highly competitive, research-intensive, or growth-focused industries that are typical of contexts requiring adaptation in the face of uncertainties. Conversely, cash is more detrimental to performance in firms that are poorly governed, diversified, or opaque, as are typical of contexts where stakeholder conflicts, information asymmetries, or power imbalances can encourage value appropriation by other stakeholders. Copyright © 2015 John Wiley & Sons, Ltd.
79 citations
TL;DR: The authors found that firms facing higher uncertainty have a higher value of cash, attributed to the increased value of the option to wait and see as well as the aggravated financial constraints and mitigated agency conflicts.
69 citations
TL;DR: In this article, the authors decompose working capital investments in the cash conversion cycle and growth effects in the presence of x-inefficiency, and predict that reductions in the Cash Conversion Cycle should increase shareholder value.
66 citations
TL;DR: In this paper, the authors investigated the determinants of the cash holdings for a sample of Saudi firms over the period 2006-2014, using static and dynamic panel models, and found that leverage, firm size, capital expenditure, net working capital and cash flow volatility are important in determining cash holdings.
64 citations
TL;DR: In this article, the authors found that having an overconfident CEO on board is associated with an increase of $0.36 in the value of $1.00 cash holding.
Abstract: Cash holding is more valuable when firms are managed by overconfident CEOs. Economically, having an overconfident CEO on board is associated with an increase of $0.36 in the value of $1.00 cash holding. The positive effect of CEO overconfidence on the value of cash concentrates among firms that are financially constrained and exhibit high growth opportunities. These results are consistent with the costly external finance hypothesis. In particular, cash saving is value-increasing for firms with overconfident CEOs because it alleviates underinvestment problems that the firms with overconfident CEOs face due to perceived costly external financing.
TL;DR: The authors found that state ownership is positively related to corporate cash holdings and that the strength of country-level institutions affects the relation between state ownership and the value of cash holdings in countries with weaker institutions.
Abstract: Using a unique sample of newly privatized firms from 59 countries, this study provides new evidence about the agency costs of state ownership and new insight into the corporate governance role of country-level institutions. Consistent with agency theory, we find strong and robust evidence that state ownership is positively related to corporate cash holdings. Moreover, we find that the strength of country-level institutions affects the relation between state ownership and the value of cash holdings. In particular, as state ownership increases, markets discount the value of cash holdings more in countries with weaker institutions.
TL;DR: In this paper, a dynamic cash management model is analysed where agents choose whether to pay with cash or credit at every point in time, and the optimality of such a decision rule is obtained by models where cash-credit decisions are made at the "beginning" of each period.
TL;DR: In this paper, the authors investigate the effects of monetary policy on corporate investment and the mitigating effects of cash holding and find that tightening monetary policy reduces corporate investment while cash holdings mitigate such adverse effects.
TL;DR: In this article, the authors investigated the impact of regional social capital on corporate cash holdings and examined the possible channels through which social capital may affect cash holdings, finding that firms from a high social capital county hold significantly less cash than firms from low social capital counties.
TL;DR: In this article, the authors examined the self-selection effect by eliminating heterogeneous intangibility across multinational and domestic firms, which reduces the cash differential by 28% and examined the likelihood of corporate inversion under federal regulations.
TL;DR: In this paper, the authors provide evidence that bank credit lines are an important tool for managing the non-fundamental component of cash flow volatility, especially for solvent small bank borrowers.
Abstract: Unexpectedly severe winter weather, which is arguably exogenous to firm and bank fundamentals, represents a significant cash flow shock for bank-borrowing firms. Firms respond to these shocks by drawing on and increasing the size of their credit lines. Banks charge borrowers for this liquidity via increased interest rates and less borrower-friendly loan provisions. Credit line adjustments occur within one calendar quarter of the shock and persist for at least nine months. Overall, we provide evidence that bank credit lines are an important tool for managing the non-fundamental component of cash flow volatility, especially for solvent small bank borrowers.
TL;DR: This paper found no significant effect for contactless credit cards and only a 2% reduction in cash usage stemming from single-purpose stored value cards, indicating uneven pace of payment innovation diffusion.
Abstract: Summary
Contactless credit cards and stored value cards are touted as a fast and convenient method of payment to replace cash at the point of sale. Cross-sectional approaches find a large effect of these retail payment innovations on cash usage (around 10%). Using a semiparametric panel model that accounts for unobserved heterogeneity and general forms of attrition, we find no significant effect for contactless credit cards and only a 2% reduction in cash usage stemming from single-purpose stored value cards. These results point to the uneven pace of payment innovation diffusion.
TL;DR: In this paper, the authors implemented an artefactual field experiment in Malawi to test the ability of households to manage a cash windfall and found that neither savings defaults nor payment delays affect the amount or composition of spending, suggesting that households manage cash effectively without the use of formal financial products.
TL;DR: In this article, the authors study the management of liquidity transformation by open-end mutual funds through cash holdings and its potential implications for financial stability using supervisory data on Italian equity funds, and show that the amount of cash holdings reduces the probability that funds experiencing significant outflows make forced sales of assets that can potentially dislocate market valuations from fundamentals.
Abstract: A key structural vulnerability of open-end mutual funds is the potential liquidity mismatch between assets and liabilities. In this paper we study the management of liquidity transformation by open-end mutual funds through cash holdings and its potential implications for financial stability. Using supervisory data on Italian equity funds, we show that the amount of cash holdings reduces the probability that funds experiencing significant outflows make forced sales of assets that can potentially dislocate market valuations from fundamentals. Moreover, our results indicate that funds engaging in forced sales hold statistically more cash at the end of a month of financial distress than funds in financial distress that do not engage in forced sales. This evidence is consistent with recent empirical findings showing that funds facing significant redemptions may exacerbate periods of market stress by hoarding cash.
TL;DR: The authors examined the joint choices of cash holdings and debt maturity for a large sample of firms for the 1985-2013 period and found that there is a positive relation between debt maturity and cash holdings.
Abstract: We examine the joint choices of cash holdings and debt maturity for a large sample of firms for the 1985–2013 period. We find that there is a positive relation between debt maturity and cash holdings. Our results hold after taking into account endogeneity among leverage, debt maturity, and cash holding. We posit that this positive relationship will be found among firms facing financial constraints and we find support for this hypothesis. Our results are robust after we control for agency problems, international taxation, bank loan liquidity covenants and default risk.
TL;DR: In this paper, the authors investigate the relation among trapped cash, permanently reinvested earnings, and foreign cash, and find that trapped cash is negatively related to firm value, but primarily for firms with poor governance.
TL;DR: This paper found that firms with negative operating cash flows account for more than half of the rise in average cash balances over a sample period, with average cash holdings increasing by 615% for negative cash flow firms vs. 95% for positive cash flow ones.
Abstract: Among U.S. firms, operating losses have become substantially more prevalent, persistent, and greater in magnitude since 1970. Loss firms now comprise over 30% of the Compustat universe and such losses continue for a median of four years. We find that firms with negative operating cash flows account for more than half of the rise in average cash balances over the sample period, with average cash holdings increasing by 615% for negative cash flow firms vs. 95% for positive cash flow firms. Further, firms exhibiting operating losses now comprise the majority of equity issuers. These issuers stockpile most of the funds raised in the issue and use these funds to cover subsequent operating losses. We conclude that the immediate and expected ongoing liquidity needs of firms with persistent operating losses have substantially altered corporate financial policies.
TL;DR: In this paper, the authors show that financial development lowers the sensitivity of cash holdings to tangible assets and promotes firm growth, and that the attenuating effect of financial development on cash-tangibility sensitivity is stronger for younger, smaller, and R&D intensive firms.
Abstract: Rising intangible assets in corporate balance sheets around the world could limit borrowing capacity and hinder growth if firms must preserve cash and forgo investment opportunities. We show that financial development lowers the sensitivity of cash holdings to tangible assets and promotes firm growth. The attenuating effect of financial development on cash-tangibility sensitivity is stronger for younger, smaller, and R&D intensive firms. We also find that sectors with a smaller proportion of tangible assets grow faster in countries with more developed financial markets. Our analysis reveals an important collateral channel through which financial development facilitates firm growth.
TL;DR: A model is developed to illustrate the mechanism through which JIT affects cash and quantify its impact, and it is shown that as firms switch from the traditional system to JIT, they shift resources from inventory to cash to facilitate transactions with suppliers.
Abstract: I explore the role of the just-in-time (JIT) inventory system in the increase in cash holdings by U.S. manufacturing firms. I develop a model to illustrate the mechanism through which JIT affects cash and quantify its impact. In the model, both cash and inventory can serve as working capital. As firms switch from the traditional system to JIT, they shift resources from inventory to cash to facilitate transactions with suppliers. On average, this switchover accounts for a 4.1-percentage-point increase in the cash-to-assets ratio, which is approximately 28% of the change observed in the data. Data are available at https://doi.org/10.1287/mnsc.2017.2775. This paper was accepted by Neng Wang, finance.
TL;DR: In this paper, the authors apply a panel regression to a data set composed of 1267 observations from 227 companies during the period 2008-2014 and reveal a significant, negative correlation between dividends per share and free cash flow.
TL;DR: This paper examined the relation between tournament-based incentives and corporate cash holdings and the value of cash and found that tournament-related incentives are positively related to cash holdings. But, they did not examine the effect of tournament based incentives on the stock market value of companies.
Abstract: This research examines the relations between tournament-based incentives and corporate cash holdings and the value of cash We find robust evidence that tournament-based incentives are positively related to cash holdings and the value of cash Moreover, the effect of tournament-based incentives on the value of cash is stronger for financially constrained firms Our evidence indicates that as tournament-based incentives motivate riskier corporate policy choices that lead to not only larger expected shareholder value but also greater cash-flow uncertainty, firms increase cash holdings to cushion potential liquidity shortfalls that may cause underinvestment
TL;DR: In this article, the authors link different recurring customer behaviors to the future level and volatility of a customer's cash flows and show that a 1% desired change in the different types of recurring customer behaviours corresponds to a future quarterly 4.61% decrease in the cash flow volatility and $39.42 million increase in the future cash flow level of the firm.
Abstract: Marketing affects customer behavior, and customer behavior in turn drives a firm’s cash flows and, ultimately, valuation. In this sequence of relationships, a commonly overlooked factor by marketers is the volatility of customers’ cash flows. This study links different recurring customer behaviors to the future level and volatility of a customer’s cash flows. Empirical analyses of the large customer database of a Fortune 500 retailer reveal that a 1% desired change in the different types of recurring customer behaviors corresponds to a future quarterly 4.61% decrease in the cash flow volatility and $39.42 million increase in the future cash flow level of the firm. Furthermore, firm-initiated marketing is 1.9–3.2 times more effective at managing the future cash flow level and volatility when it is selectively targeted to customers with certain characteristics. Overall, the study enables marketers to manage different customer behaviors that influence customers’ future cash flow level and volatility ...
TL;DR: In this paper, the authors examined the financial determinants of corporate cash holdings using a panel data regression method and used the fixed-effects method based on Hausman test results.
Abstract: This article aims at examining the financial determinants of corporate cash holdings. The study employs panel data regression method. It uses the fixed-effects method based on Hausman test results ...
TL;DR: In this article, the authors transform indirect method cash flow statements into disaggregated and more direct estimates of cash flows from operations and other sources and form portfolios on the basis of these measures.
Abstract: Although various income statement–based measures predict the cross section of stock returns, direct method cash flow measures have even stronger predictive power. We transform indirect method cash flow statements into disaggregated and more direct estimates of cash flows from operations and other sources and form portfolios on the basis of these measures. Stocks in the highest-cash-flow decile outperform those in the lowest by over 10% annually (risk adjusted). Our results are robust to investment horizons and across risk factors and sector controls. We also show that, in addition to operating cash flow information, cash taxes and capital expenditures provide incremental predictive power.