Showing papers on "Cash flow statement published in 2004"

Corporate Financial Policy and the Value of Cash

Abstract: We examine the cross-sectional variation in the marginal value of corporate cash holdings arising from differences in corporate financial policy. We begin by providing semi-quantitative predictions for the value of an extra dollar of cash depending upon whether that dollar will most likely go to i) increasing distributions to equity, ii) reducing the amount of cash that needs to be raised in the capital markets, or iii) servicing debt or other liabilities. We then relate firm financial structure characteristics to the likelihood of firms engaging in these actions, and derive a set of intuitive hypotheses to test empirically. We generate estimates of the marginal value of cash by examining the variation in excess stock returns over the fiscal year and find results that are both qualitatively and quantitatively consistent with all hypotheses tested. In particular, we find that the marginal value of cash declines with larger cash holdings, higher leverage, better access to capital markets, and as firms choose to distribute cash via dividends rather than repurchases.

Do Investors Overvalue Firms With Bloated Balance Sheets

Abstract: If investors have limited attention, then accounting outcomes that saliently highlight positive aspects of a firm's performance will promote high market valuations. When cumulative accounting value added (net operating income) over time outstrips cumulative cash value added (free cash flow), it becomes hard for the firm to sustain further earnings growth. When the balance sheet is 'bloated' in this fashion, we argue that investors with limited attention will overvalue the firm, because naive earnings-based valuation disregards the firm's relative lack of success in generating cash flows in excess of investment needs. The level of net operating assets, the difference between cumulative earnings and cumulative free cash flow over time, is therefore a measure of the extent to which operating/reporting outcomes provoke excessive investor optimism. Therefore, if investor attention is limited, net operating assets will negatively predict subsequent stock returns. In our 1964-2002 sample, net operating assets scaled by beginning total assets is a strong negative predictor of long-run stock returns. Predictability is robust with respect to an extensive set of controls and testing methods.

Cash and Corporate Control

Abstract: The takeover market is often suggested as appropriate for containing the agency problems of excessive corporate cash holdings. However, recent studies report contradictory evidence. I focus on the takeover-deterrence effects of corporate liquidity and suggest the proxy contest as an effective alternative control mechanism. I find that proxy fight targets hold 23% more cash than comparable firms, and that the probability of a contest is significantly increasing in excess cash holdings. Proxy fight announcement return also is positively related to excess cash. Following a contest, executive turnover and special cash distributions to shareholders increase, while cash holdings significantly decline. QUITE OFTEN, THE TAKEOVER MARKET is suggested as ideal for containing the agency problems of corporate free cash flow. Contrary to this, however, Harford (1999) and Pinkowitz (2002) both find that the likelihood of a firm becoming a takeover target is significantly negatively related to the holding of excess cash. This result could be explained in terms of the takeover-deterrence effects of corporate liquidity. Excess cash enhances the ability of a hostile target to defend itself against an unwanted bid. Such defenses include repurchasing stock, acquiring a competitor of the bidder and filing private antitrust litigation, or turning around to acquire the suitor itself (Bagwell (1991), Stulz (1988), and Dann and DeAngelo (1988)). In addition, excess cash increases the bidder’s uncertainty about the value of the target since it can be used to engage in bidder-specific negative net present value activities. Thus, holding excess cash may serve as a deterrent to would-be bidders. This paper focuses on the takeover-deterrence effects of excess cash and suggests the proxy contest as an effective control mechanism for addressing the agency problems of excessive corporate liquidity. As in a hostile takeover situation, management will employ all available defenses in a proxy contest. Nevertheless, I propose that dissident shareholders conducting a proxy fight independently of a takeover bid are not encumbered by the considerations that may deter a hostile bidder.

Do Accruals Drive Firm‐Level Stock Returns? A Variance Decomposition Analysis

Abstract: This paper extends the variance decomposition framework of Campbell [1991], Campbell and Ammer [1993], and Vuolteenaho [2002] to address the relative value relevance of accrual news, cash flow news, and expected-return news in driving firm-level equity returns. The extension is based on the Feltham-Ohlson [1995, 1996] clean surplus relations. Using three models, this study shows that all three factors, accruals, cash flows, and expected future discount rates are value relevant. Moreover, accrual news is found to significantly dominate expected-return news in driving firm-level stock returns. Operating income news is also found to significantly dominate both expected-return news and free cash flow news in driving firm-level stock returns. Furthermore, after splitting net income into cash flow and accrual earnings components in the Vuolteenaho model, accrual earnings news and cash flow earnings news are found to equally drive firm-level stock returns and to dominate expected-return news. Further disaggregation of the data yields some evidence that accrual earnings news is a more important factor than cash flow earnings news in driving current stock returns. Overall, the three models indicate that changes in expected future accruals are a primary driver, if not the primary driver, of current stock returns.

Empirical Studies on Cash Payments

Abstract: Jeanine Kippers (1973) obtained her master´s degree in econometrics from the Erasmus University Rotterdam in 1997. In the same year she was employed by De Nederlandsche Bank. She participated in the preparations of the cash changeover from guilder to euro in 2002, and contributed to the development of a European cash distribution system and the restructuring of the national distribution system. During her employment at the central bank she started her research on currency use, which resulted in several papers that have been published or are currently under review. In January 2004 she joined the Pensionand Insurance Supervisory authority, as a policy advisor in the (international) field of insurance supervision.

How Do Debit Cards Affect Cash Demand? Survey Data Evidence

Abstract: This paper analyzes how EFT-POS payments and ATM withdrawals affect cash demand. In particular, survey data about Austrian individuals are employed to estimate a purse cash demand equation, which takes account of sample selection effects. The results reveal that purse cash demand is significantly and sizably affected by debit card usage and that there are significant differences in cash demand for individuals with different debit card usage frequencies. In addition, the effect of EFT-POS payments on cash use at the point-of-sale is discussed on the basis of data from a consumer transaction survey.

Corporate Data and Future Cash Flows

Abstract: This article examines the ability of current accounting data to explain future cash flows for UK firms, as disclosed under FRS1(1991). Rather than examining price data — from which cash flow implications have to be inferred — we follow the more direct approach used in several recent US studies, in which actual future cash flow data are examined. Specifically, our methodology is a development of the OLS regression framework employed by Barth et al. (2001). We provide a replication of their main OLS analysis, and then extend this to deal with fixed effects and time trends in the levels of cash flow data. Our study finds that the disaggregation of earnings into cash flows and accruals, generates superior explanatory power with regard to future cash flows.

Principles of Cash Flow Valuation: An Integrated Market-Based Approach

Abstract: Basic concepts in market-based cash flow valuation Time value of money (TVM) and introduction to cost of capital Basic review of financial statements and accounting concepts Constructing integrated pro-forma financial statements Derivation of the free cash flows Using the WACC in theory and in practice Estimating the WACC for non traded firms Beyond the planning period: calculating the terminal value Theory for cost of capital revisited How are Cash Flows Valued in Reality?

Agency problems and capital expenditure announcements

Abstract: This article examines the market valuation of announcements of new capital expenditure. Prior research suggests that the firm's growth opportunities and cash flow position condition the market response. This study jointly examines the role of growth and cash flow, and the interaction between them. Using a new data set of Australian firms that avoids problems associated with expectations models, the results are remarkably strong and support a positive association between growth opportunities and the market valuation, in addition to supporting the role of free cash flow. The findings have implications for the relationship between general investment information and stock prices.

Annual corporate information: importance and use in Saudi Arabia

Abstract: This study examines the perceptions of the users of annual corporate reports in Saudi Arabia. The focus is on the use and importance of the seven different sources of corporate information contained in Saudi annual reports. This includes the board of director's report, the auditor's report, the balance sheet, the income statement, the statement of retained earnings, cash flow statements and the notes to the financial statements. Our sample comprises five major user groups, namely individual investors, institutional investors, creditors, government officials, and financial analysts. In comparison with previous research efforts elsewhere around the world, this study found that the balance sheet and the income statement are the most important sections of the annual report to most of the Saudi users’ groups. The board of directors’ report was found to be the least popular. As far as the cash flow statement is concerned, the individual investors were found to place much less importance to this statement, a finding that is similar to what has been reported in previous literature about investor behaviour in other areas of the world.

Construction Accounting and Financial Management

Abstract: Part I. Introduction to Construction Financial Management 1. Construction Financial Management Part II. Accounting for Financial Resources 2. Construction Accounting Systems 3. Accounting Transactions 4. More Construction Accounting 5. Depreciation 6. Analysis of Financial Statements Part III. Managing Costs and Profits 7. Managing Costs 8. Determining Labor Burden 9. Managing General Overhead Costs 10. Setting Profit Margins for Bidding 11. Profit Center Analysis Part IV. Managing Cash Flows 12. Cash Flows for Construction Projects 13. Projecting Income Taxes 14. Cash Flows for Construction Companies 15. Time Value of Money 16. Financing a Company's Financial Needs Part V. Making Financial Decisions 17. Tools for Making Financial Decisions 18. Income Taxes and Financial Decisions Appendix A. Computerized Accounting Systems Appendix B. Excel Primer Appendix C. Trend Analysis Appendix D. Derivation of Selected Equations Appendix E. Interest Factors Appendix F. Glossary Appendix G. List of Variables Index

Financial visualization and analysis systems

Abstract: A method and system of financial analysis for use by trained and untrained users, which provides improved visualization, understanding, and analysis of companies’ financial performances. Particularly, it allows the end user to prepare a sophisticated financial analysis by creating an effective bridge between financial analysis and the underlying financial information. It uses interfaces similar to digital video editors to permit sequential analysis with annotation of financial data in the same manner as editing and compositing film or video materials. It presents the financial data and related non-financial data in a visual analog format for discussion and analysis by one or more users. The income statement, balance sheet and statement of cash flows are analyzed as a whole rather than separately as individualized statements. And it provides for direct interfaces with all underlying financial and related data. The analysis steps created by a user may be capture and recorded for later playback, communication and analysis. A recorded analysis may be modifiable allowing analysis, input and comment by other individuals to form a comparative analysis that is an analytical sum of all contributors.

The economics and politics of accounting : international perspectives on research, trends, policy, and practice

Abstract: Preface 1. Introduction and Overview PART I: ONE THE ECONOMICS AND ROLES OF ACCOUNTING ROLES OF FINANCIAL ACCOUNTING: EQUITY VALUATION 2. Accounting and Economics: What We Learn From Analytical Models in Finanical Accounting and Reporting 3. Aspects of the Future in Accounting: The Use of Market Prices and 'Fair Values' in Financial Reports 4. The Limitations of Financial Reporting ROLES OF FIANANCIAL ACCOUNTING: PERFORMANCE MEASUREMENT AND CORPORATE GOVERNANCE 5. Value-Based Management and Performance Measures: Cash Flow Versus Accrual Accounting 6. Corporate Governance and Financial Reporting at Daimler-Benz (DaimlerChrysler) AG: From a 'Stakeholder' Toward a 'Shareholder Value' Model PART II: ON THE REGULATION AND ENFORCEMENT OF ACCOUNTING DISCLOSURE REGULATION 7. Policy Implications from the Theory-Based Literature on Disclosure 8. Proprietary Versus Non-Proprietary Disclosures: Evidence from Germany ENFORCEMENT OF ACCOUNTING STANDARDS 9. New Accounting for Goodwill: Application of American Criteria from a German Perspective 10. Compliance with German and International Accounting Standards in Germancy: Evidence from Cash Flow Statements 11. Audit Regulation, Audit Quality, and Audit Research in the Post-Enron Era: An Analysis of Non-Audit-Services PART III: ON THE POLITICS AND STANDARD SETTING OF ACCOUNTING THE ROLE OF ACCOUNTING IN SOCIETY AND CONSTITUENT LOBBYING 12. The Politics and Ontology of Accounting 13. Constituent Lobbying and its Impact on the Development of Financial Reporting Regulations: Evidence from Germany 14. Drafting Accounting Law: An Analysis of Institutionalised Interest Representations STANDARD SETTING PROCESSES AND INTERNATIONAL ACCOUNTING STANDARDS 15. From Accounting Directives to International Accounting Standards 16. Academics in the Accounting Policy Process: England and Germany Compared

Incentives vs. Control: An Analysis of U.S. Dual-Class Companies

Abstract: Dual-class common stock allows for the separation of voting rights and cash flow rights across the different classes of equity. We construct a large sample of dual-class firms in the United States and analyze the relationships of insider's cash flow rights and voting rights with firm value, performance, and investment behavior. We find that relationship of firm value to cash flow rights is positive and concave and the relationship to voting rights is negative and convex. Identical quadratic relationships are found for the respective ownership variables with sales growth, capital expenditures, and the combination of R&D and advertising. Our evidence is consistent with an entrenchment effect of voting control that leads managers to underinvest and an incentive effect of cash flow ownership that induces managers to pursue more aggressive strategies.

Computer system for controlling a system of managing fluctuating cash flows

Abstract: Apparatus (method implemented with a machine, the machine, and the method for making the machine, and products produced thereby) for controlling a system of managing cash flows for a transaction, the apparatus including: data processing means arranged for receiving information into memory, said information including respective descriptions of risks, statistical assumptions for said risks, and financial assumptions for said risks, the data processing means further including: calculating means, responsive to said descriptions and said assumptions, for calculating expected cash flows corresponding to said risks for time periods; accounting means for determining, responsive to actual cash flow information from occurrence of events corresponding to said risks, for a first party to the transaction owing the expected cash flows to a second party to the transaction, and for determining, for the second party owing the actual cash flows to the first party, a net settlement, for each of said time periods, between the parties in the transaction, to manage the actual cash flows and the expected cash flows.

Corporate Cash Holdings and Agency Conflicts

Abstract: The paper explores the institutional context as a driving force of cash holdings, focusing on the role of ownership concentration, voting rights, growth opportunities, and information asymmetries. For this purpose, we use a sample of 128 Swiss firms for the period 1990-2000 as Swiss firms are characterized by high cash levels and concentrated ownership. Also, minority shareholders are poorly protected in Switzerland. Our results show that both the tradeoff and pecking order theories are at work. More importantly, we find that the institutional context substantially affects cash holding behavior as firms with less concentrated ownership retain more cash. Finally, firms with different voting right shares adjust more slowly than firms with simple and unique voting right structure.

The Impact of Ownership Structure on Debt Financing of Japanese Firms With the Agency Cost of Free Cash Flow

Abstract: This paper, using 833 observations of listed Japanese firms between the years 1992 to 2000, explore the implications of the free cash flow hypothesis concerning the disciplinary role of ownership structure in corporate capital structure policy. The results show (1) the sensitivity of ownership structure to leverage depends on growth opportunities and free cash flow. (2) Keiretsu classification affects relations between ownership structure and leverage. Overall, the results generally support the free cash flow hypothesis.

Is Cash Negative Debt

Abstract: We model a firm’s decision to allocate excess cash flows to cash holdings versus debt reductions in the presence of financing constraints. Our model shows that holding cash allows firms to hedge against the eect of future cash flow shortfalls on constrained investment, but that reducing current leverage is a more eective way to increase investment in future states of nature in which cash flows are high. This trade-o in the cash‐debt decision generates the prediction that constrained firms will prefer to allocate current cash flows into cash holdings if their hedging needs are high (that is, if the correlation between cash flows and the availability of new investment opportunities is low), but that the same constrained firms will use cash flows to reduce debt if their hedging needs are low. The empirical examination of (joint) debt and cash policies of a large sample of firms over the 1971-2001 reveals evidence that is consistent with our theory. In particular, we find that financially constrained firms with high hedging needs show a strong propensity to save cash out of excess cash flows, leaving their debt positions largely unchanged. Constrained firms with low hedging needs, in contrast, behave much alike financially unconstrained firms in that they strongly favor the use of excess cash flows towards debt redemption (they save debt capacity) and only at the margin allocate cash flow surpluses into their cash accounts. In general, our results show that cash is not always equal to negative debt: cash savings and debt repayments play a distinct role in the optimization of investment under financial constraints.

Corporate Life Cycle and the Value Relevance of Cash Flow versus Accrual Financial Information

Abstract: Motivated by recently renewed criticism of the current accrual accounting model we re-examine the extent to which cash flow and accrual accounting based measures are value relevant, and capable of explaining periodic changes in the firm's market value. Using the R square as a measure of explanatory power, we find that, in general, both cash flow and accrual accounting figures exhibit a low value-relevant level but, depending on the firm's life cycle, the explanatory power of accrual accounting exceeds that of cash flow measures. We also find that the firm's industry affiliation does not affect the cash flow/accrual accounting dominance relations per se. It affects, however, the magnitude of the gap between the R squares measures that pertain to the cash flow figures and those pertaining to their accrual accounting counterpart figures. Implications of our findings for researchers and the valuation of firm's value are also offered in the paper.

Multi-dimensional business information accounting software engine

Abstract: A multi-dimensional business information accounting software engine accepts input of user defined business specific textual or numeric information and conventional financial accounting data and converts them to indexed star schema multi-dimensional computer data as a journal entry. Upon user request the journal entry is analyzed by relational or other database methodology to generate conventional accounting statements such as general ledger, balance sheet, cash flow statements, profit and loss statements and earned income statements for user specified time periods. The multi-dimensional business information accounting software engine can also generate accounting statements of sliced data according to a range of business specific numeric information or accounting statements pertinent to a textual business specific information for a specified time period, providing the user sensitivity of different business specific information on accounting statements, so that the user can modify his business practices on real time.

Statement of Cash Flows: Time for Change!

Abstract: The statement of cash flows is one of the three basic financial statements required under generally accepted accounting principles (GAAP). Recent financial reporting scandals have shown that this basic financial statement is in need of reform. The presentation of operating cash flow using the indirect method is confusing to many readers, including financial analysts. The terminology used in the statement is unclear and unhelpful. The misclassification of specific cash flows in the operating, financing, or investing sections can result in overstatement of operating cash flow. The direct method for reporting cash flow from operations is recommended, together with an improved reconciliation of operating cash flow to net income. Moreover, companies need better guidance on classifying individual cash flows; the statement itself needs improved descriptions and straightforward terminology.

The benefits of holding cash: a real options approach

Abstract: Companies need to decide on the optimal amounts of cash to hold. Although this problem has long been acknowledged as a major issue for corporations, new advances in the finance literature have not been fully implemented in this area. We propose here what we believe is the first modelization of a real options approach to determine the financial benefits of holding cash. We measure the benefits of holding cash if raising new capital takes time, is costly and if the firm faces the risk of having to issue underpriced securities to obtain that capital. We show that the methodology proposed leads to non‐intuitive results that warrant further research in the field and should attract academics’ as well practitioners’ attention.

Corporate Governance Mechanisms and Corporate Cash Holdings

Abstract: In this paper, we examine whether corporate governance mechanisms play some role in determining the cash balances held by Singapore corporations. We document that board size, insider dominance of the board, and non-management blockholder ownership are important determinants of cash holdings. We further find that the incremental value of holding excess cash is negative even after controlling for board size or insider dominance. These findings are consistent with the agency view of cash holdings. Managers in firms with poor corporate governance have more discretion over corporate cash policies, and the value reduction imposed on these firms may reflect minority shareholders' recognition of the possibility of managerial entrenchment.

Accounting for Employee Stock Options

Abstract: Accounting for employee stock options is affected by whether outstanding options are viewed as equity or liabilities. The common perception is that the FASB's recommended treatment (per SFAS No. 123), which is based on the options‐as‐equity view, results in representative financial statements. We argue that this treatment distorts performance measures for three reasons. First, the deferred taxes associated with nonqualified options should also be included as equity, but are not. Second, since unexpected share price changes affect optionholders and equityholders differently, combining their interests provides an average earnings effect that is not representative for either group. We show that efforts to isolate the interests of common stockholders via diluted earning per share calculations (per SFAS No. 128) are inherently incapable of identifying wealth transfers between stockholders and optionholders. Finally, projections of future cash flow statements prepared under SFAS No. 95 overstate cash flows to c...

Cash management behavior of firms and its structural change in an emerging money market

Abstract: Driven by fast evolution in the money market during the past two decades, financial and technological innovations, increasing competition, and internationalizing of businesses, cash and treasury management has become an increasingly important function in most firms. It is reasonable to expect that the role of financial transactions in the cash management process in adding to firm value has increased its importance and changed the cash management behavior of firms. The main purpose of this study is to investigate this potential behavioral change in cash management by examining the cash management practices behind the models explaining the cash management behavior and to test the stability of some of these models. It is hypothesized that the environmental changes have been remarkable enough to change the cash management behavior, which can be seen as a structural change in the cash management function. The factors assumed to explain this phenomenon may concern organizational and technological arrangements in cash management, likewise professional skills in the area of financial transactions and incentives for these especially created by emerging money markets. The examination was conducted using the survey method to map out the best cash management practices followed by Finnish listed manufacturing and service companies and by testing the stability of both static and dynamic models explaining cash management behavior. The empirical part of the study is based on three questionnaires in three separate years, namely 1988, 1994, and 2000, and the empirical estimation of the selected cash management models using financial statement data for the years 1972 to 2001. The study concludes that during the research period firms have achieved a significant technological progress (improving systems and methods) and significant behavioral changes (increasing professionalism) concerning cash management practices, referring to opportunities for more effective cash management operations. The stability tests of cash management models indicated that a structural change in cash management behavior occurred after the deregulation years in the money market. These results were consistent with the surveys referring the development in the efficiency of the firms' cash management.

Fundamentals of Financial Accounting

Abstract: 1 Business Decisions and Financial Accounting 2 Reporting Investing and Financing Results on the Balance Sheet 3 Reporting Operating Results on the Income Statement 4 Adjustments, Financial Statements, and the Quality of Financial Reporting 5 Corporate Financial Reporting and Analysis 6 Internal Control and Financial Reporting for Cash and Merchandising Operations 7 Reporting and Interpreting Inventories and Cost of Goods Sold 8 Reporting and Interpreting Receivables, Bad Debt Expense, and Interest Revenue 9 Reporting and Interpreting Long-Lived Tangible and Intangible Assets 10 Reporting and Interpreting Liabilities 11 Reporting and Interpreting Stockholders' Equity 12 Reporting and Interpreting the Statement of Cash Flows 13 Measuring and Evaluating Financial Performance Appendix A Landry's Restaurants, Inc 2005 Annual Report. Appendix B Outback Steakhouse, Inc. Form 10-K Appendix C Present and Future Value Concepts Appendix D Reporting and Interpreting Investments in Other Corporations