Showing papers on "Cash flow statement published in 2006"

Accounting Information, Disclosure, and the Cost of Capital

Abstract: In this paper we examine whether and how accounting information about a firm manifests in its cost of capital, despite the forces of diversification. We build a model that is consistent with the CAPM and explicitly allows for multiple securities whose cash flows are correlated. We demonstrate that the quality of accounting information can influence the cost of capital, both directly and indirectly. The direct effect occurs because higher quality disclosures reduce the firm's assessed covariances with other firms' cash flows, which is non-diversifiable. The indirect effect occurs because higher quality disclosures affect a firm's real decisions, which likely changes the firm's ratio of the expected future cash flows to the covariance of these cash flows with the sum of all the cash flows in the market. We show that this effect can go in either direction, but also derive conditions under which an increase in information quality leads to an unambiguous decline the cost of capital.

Over-Investment of Free Cash Flow

Abstract: This paper examines the extent of firm level over-investment of free cash flow. Using an accounting based framework to measure over-investment and free cash flow, I find evidence that, consistent with agency cost explanations, over-investment is concentrated in firms with the highest levels of free cash flow. Further tests examine whether firms' governance structures are associated with over-investment of free cash flow. The evidence suggests that certain governance structures, such as the presence of activist shareholders, appear to mitigate over-investment.

International Evidence on Cash Holdings and Expected Managerial Agency Problems

Abstract: This paper uses managerial control rights data for over 5000 firms from 31 countries to examine the net costs and benefits of cash holdings. We find that when external country-level shareholder protection is weak, firm values are lower when controlling managers hold more cash. Further, when external shareholder protection is weak we find that firm values are higher when controlling managers pay dividends. Only when external shareholder protection is strong do we find that cash held by controlling managers is unrelated to firm value, consistent with generally prevailing U.S. and international evidence.

Bank Lines of Credit in Corporate Finance: An Empirical Analysis

Abstract: I empirically examine the factors that determine whether firms use bank lines of credit or cash in corporate liquidity management. Bank lines of credit, also known as revolving credit facilities, are a viable liquidity substitute only for firms that maintain high cash flow. Firms with low cash flow are less likely to obtain a line of credit, and rely more heavily on cash in their corporate liquidity management. An important channel for this correlation is the use of cash flow-based financial covenants by banks that supply credit lines. Firms must maintain high cash flow to remain compliant with covenants, and banks restrict firm access to credit facilities in response to covenant violations. Using the cash flow sensitivity of cash as a measure of financial constraints, I provide evidence that lack of access to a line of credit is a more statistically powerful measure of financial constraints than traditional measures used in the literature.

Corporate Governance and Firm Cash Holdings

Abstract: We examine the relation between the management of cash holdings and corporate governance. We find that firms with weaker corporate governance have smaller cash reserves. Further tests suggest that these firms dissipate their cash reserves more quickly than do managers of firms with stronger governance, and that rather than investing internally, they spend the cash primarily on acquisitions. The investment of cash by weakly governed managers reduces future profitability, an effect that is priced into those firms' stocks. We conclude that self-interested managers choose to spend cash quickly rather than gain flexibility through stockpiling it. This suggests that the expected discipline costs of visibly accumulating excess cash reserves are high. Our results, which contrast with recent research on the cross-country relation between shareholder rights and cash holdings, help explain how country level shareholder rights interact with firm-level agency problems and shareholder power.

The Response of Firms' Investment and Financing to Adverse Cash Flow Shocks: The Role of Bank Relationships

Abstract: We test whether firms with a single bank are better shielded from loss of credit and investment cuts in periods of adverse cash flow shocks than firms with multiple bank relationships. Our estimates of the cash flow sensitivity of investment show that both types of firms are equally subject to financing constraints that bind only in the event of adverse cash flow shocks. In these periods, firms incur lower cuts in investment expenditures when they can obtain extra credit. In periods of adverse cash flow shocks, the probability of obtaining extra bank debt becomes more sensitive to the size and leverage of the firm.

International Evidence on the Non-Linear Impact of Leverage on Corporate Cash Holdings

Abstract: This paper investigates cash holding behaviour of firms from France, Germany, Japan, the UK and the US using data for 4,069 companies over the period 1996-2000. Our focus is particularly on the relation between cash holdings and leverage. We argue that the impact of leverage on cash balances of firms is likely to be non-monotonic. To the extent that leverage of firms acts as a proxy for their ability to issue debt one would expect a negative (substitution effect) relation between leverage and cash holdings. However, as leverage increases firms are likely to accumulate larger cash reserves to minimise the risk of financial distress and costly bankruptcy. Thus, one would expect a positive (precautionary effect) relationship between cash holdings and leverage at high levels of leverage. Our findings provide strong and robust support for a significant non-linear relation between cash holdings and leverage. Additionally, our results show that the impact of leverage on cash holdings partly depends on country-specific characteristics such as the degree of creditor protection, shareholder protection, and ownership concentration.

Why Do Managers Voluntarily Issue Cash Flow Forecasts?: voluntary cash flow forecasts

Abstract: We study a relatively recent change in voluntary disclosure practices by management, namely, the issuance of cash flow forecasts. We predict and find that management issues cash flow forecasts to signal good news in cash flow, to meet investor demand for cash flow information, and to precommit to a certain composition of earnings in terms of cash flow versus accruals, thus reducing the degree of freedom in earnings management. Our results also suggest that management discloses good news in cash flow to mitigate the negative impact of bad news in earnings, to lend credibility to good news in earnings, and to signal economic viability when the firm is young. Our finding that management cash flow forecasts primarily convey good news is in contrast to the generally negative nature of management earnings guidance and suggests that different incentives drive firms' disclosure of different financial information.

The Persistence and Pricing of the Cash Component of Earnings

Abstract: Prior research shows that the cash component of earnings is more persistent than the accrual component of earnings. We investigate whether the persistence of the cash component is influenced by management's decision to retain or distribute cash flows. We find that when firms retain the cash flows, the cash component has low persistence almost identical to that of accruals. Only when the cash flows are distributed to equity holders does the cash component have high persistence. We investigate whether investors understand the differential implications of each use of cash flows for future earnings. Inconsistent with a naive fixation on earnings, we find that investors correctly price cash flows relating to equity and debt distributions. However, we find that retained cash flows are mispriced in a similar manner to accruals. Our results are consistent with a combination of investors misunderstanding diminishing marginal returns to new investments and/or over-investment. Our results also suggest that discounted free cash flows valuation models should explicitly forecast retained cash flows.

Is Cash Negative Debt? A Hedging Perspective on Corporate Financial Policies

Abstract: We model the interplay between cash and debt policies in the presence of financial constraints. While saving cash allows financially constrained firms to hedge future investment against income shortfalls, reducing current debt (saving debt capacity) is a more effective way to boost investment in future high cash flow states. This tradeoff implies that constrained firms will prefer cash to debt capacity if their hedging needs are high (i.e., if the correlation between operating income and investment opportunities is low), but will prefer debt capacity to cash if their hedging needs are low. The empirical examination of cash and debt policies of a large sample of constrained and unconstrained firms reveals evidence that is consistent with our theory. In particular, financially constrained firms with high hedging needs show a strong propensity to save cash out of cash flows, while displaying no propensity to reduce debt. In contrast, constrained firms with low hedging needs systematically channel cash flows towards debt reduction, as opposed to cash savings. Our analysis points to an important hedging motive behind standard financial policies such as cash and debt management. It suggests that cash should not be viewed as negative debt in the presence of financing frictions.

The Incremental Information Content of Earnings, Funds Flow and Cash Flow: The U.K. Evidence

Abstract: This paper investigates the incremental information content of three accounting performance measures for U.K. firms: earnings, funds flow and cash flow. Based on tests of association using the most general specifications suggested by the recent literature incorporating time-varying parameters and a non-linearity in response coefficients, a pattern of consistent results emerges. All three performance measures have explanatory power for returns individually and the response coefficients on their unexpected components are positive. The results further show that earnings, funds flow and cash flow all have incremental information content.However, the response coefficients on the unexpected components are consistently positive across years only for earnings and funds flow.

The Determinants of Investment-Cash Flow Sensitivity

Abstract: Using firm-level estimates of investment-cash flow sensitivity, I classify firms into groups of high, low, and negative sensitivity. I find that investment-cash flow sensitivity is non-monotonic with respect to financial constraints, cash flows, and growth opportunities. Specifically, firms with negative cash flow sensitivity have the lowest cash flows and highest growth opportunities, and appear the most financially constrained. Cash flow insensitive firms have the highest cash flows and lowest growth opportunities, and appear the least financially constrained. At least partially, negative cash flow sensitivity is driven by high investment and low cash flow levels at the inception of firms as public companies, which decrease and increase, respectively, with age.

The Effects of Financial Statement and Informational Complexity on Cash Flow Forecasts

Abstract: We characterize the operating-activities section of the indirect-approach statement of cash flows as backwards because it presents reconciling adjustments in a way that is opposite from the intuitively appealing, future-oriented, Conceptual Framework definitions of assets, liabilities and the accruals process. We propose that the reversed-accruals orientation required in the currently mandated indirect-approach statement of cash flows is unnecessarily complex, causing increased cash-flow forecast error and dispersion. We also predict that the mixed pattern (i.e., /-, -/ ) of operating cash flows and operating accruals reported by most companies also impedes investors' ability to learn the time-series properties of cash flows and accruals. We conduct a carefully controlled experiment and find that (1) cash-flow forecasts have lower forecast error and dispersion when the indirect-approach statement of cash flows starts with operating cash flows and adds changes in accruals to arrive at net income and (2) cash-flow forecasts have lower forecast error and dispersion when the cash flows and accruals are of the same sign (i.e., / , -/-) with the sign-based difference attenuated in the forward-oriented statement of cash flows. We also conduct a quasi-experiment to test our mixed-sign versus same-sign hypotheses using an archival sample of publicly available Value Line cash-flow forecasts. We find that Value Line analysts' cash-flow forecasts exhibit the same pattern of forecast error as documented in our experiment.

The Determinants and the Value of Cash Holdings: Evidence from French firms

Abstract: This paper investigates the determinants of the cash holdings of French firms over the period 1998- 2002, using the trade-off theory and the pecking order theory. We show that French firms increase their cash level when their activities are risky and the levels of their cash flow are high, and reduce it when they are highly leveraged. Growth companies hold higher cash levels than mature companies. For growth companies, there is a negative relation between cash and the following firm's characteristics: size, level of liquid assets and short-term debt. The cash level of mature companies increases with their size, their investment level, and the payout to their shareholders in the form of dividends or stock repurchases, and decreases with their trade credit and their expenses on research and development. Further results indicate that the firm's market value as measured by Tobin's Q increases with its cash level. This positive relation is stronger for growth companies than for mature companies.

Financial accounting and reporting

Abstract: Basic Theory & Financial reporting.Inventory.Fixed Assets.Monetary Current Assets & Current Liabilities.Present Value.Deferred Taxes.Stockholders' Equity.Investments.Statement of Cash Flows.Business Combinations & Consolidations.Derivative Instruments & Hedging Activities.Miscellaneous.Governmental.Not-For-Profit.Index.

Cash or Food Aid? A General Equilibrium Analysis for Ethiopia

Abstract: This article examines the relative effectiveness of cash and in-kind food aid, using an economy-wide modelling framework and a social accounting matrix constructed for Ethiopia. It argues that cash aid has larger positive effects on household welfare, with multiplier effects on households other than direct recipients, and that food aid provides a disincentive to local food production. However, where cash transfers cause food prices to rise, welfare losses may be suffered by those who are neither targeted nor beneficiaries. The highly aggregated nature of the model allows only a tentative policy recommendation in favour of cash transfers.

Accruals, Cash Flows and the Post‐Earnings‐Announcement Drift

Abstract: Several prior studies have shown that cash flows have significantly greater impact on stock prices than accruals. We examine the implications of these findings for the post-earnings-announcement-drift anomaly. We argue that, if investors under-react to earnings news, then the larger price impact of cash flows causes the cash flow component of earnings news to predict future returns better than the accruals component. Consistent with this argument, we show that unexpected cash flows are more positively related to future returns, than are unexpected accruals. Also, unexpected cash flows are found to predict future returns above and beyond that predicted by earnings surprises. Finally, we show that a strategy that decomposes earnings news into its components significantly outperforms strategies based on earnings news alone. The results support under-reaction explanations for the drift.

After the “Bubble”: Valuation of Telecommunications Companies by Financial Analysts

Abstract: In this article, we present the results of a series of interviews given by financial analysts specializing in the European telecommunications industry. Our objective is to gain an insight into their approaches to analysis and valuation (information sources, valuation methods, determinants of recommendations, etc.). We also consider whether analysts' approaches have changed since the “high-tech bubble”. We find that today they rely much more on the discounted cash flow analysis method than at the end of the 1990s, when valuation was largely based on multiples. In line with this, analysts have changed their focus from revenue-oriented measures towards an assessment of profitability and cash flow generation. Further, analysts claim to have become more diligent and more critical in their analysis.

Cash Versus Accrual Accounting in Public Sector

Abstract: In public sector the cash basis of accounting has been traditionally used, but in the last period there have been discussions over the benefits of a change to the accrual basis. There are a lot of important supporters of cash basis like IFAC,who issued 21 IPSAS, based on IAS/IFRS, EU commission and IMF. Many organizations like SIGMA and the DFID which work in transitional and developing countries, question the priority, for these countries at least, of moving from the cash to the accrual basis of accounting. So, the move to the accrual basis for public sector financial reporting has not gained universal acceptance. In Europe, there are a lot of countries who refuse to make the exchange, or who have increased doubts. In this confuse international context Romania starting with 2006 implement the accrual accounting for public sector. In our article we intend to analyze the evolution of movement from cash to accrual accounting in public sector, the factors who influenced the movement in the case of Romanian accounting public sector and to respond at the follows questions: - It is better or not for romanian public sector accounting to make the movement from cash to accrual accounting? - Romania had or not the chance to choose the system?

Overseas bankers in the UK and their use of information for making lending decisions: Changes from 1985

Abstract: This paper is concerned with the information used by one set of users, namely bankers, and the changes in their usage of information over time. The work replicates and revisits the work of Berry, A., Citron, D., Jarvis, R., 1985. Foreign banks operating in the UK—their information requirements, usage and suggested improvements to financial reporting, implications for the accounting profession. European Accounting Association Conference, Brussels. The population surveyed was drawn from the same source as that used for the earlier study although, as might be expected in a dynamic environment, the individual bankers making up that population were not identical. The results show that accounting information, as a whole, remains a very important source of information informing the bankers' decision-making processes but that the relative importance and usage of the components has changed. Some of these changes are positive in that they suggest that there have been improvements to the information content provided, for example in contrast to the findings of Bartlett, S.A., Chandler, R.A., 1997. The Corporate Report and the private shareholder: Lee and Tweedie twenty years on. British Accounting Review 29, 245–261, the cash flow statement is seen as more important than the profit and loss account or balance sheet. Other changes are perhaps of more concern to accounting standard setters as the results represent a decrease in the perceived importance of key components of financial statements, for example, the audit report and the statement of accounting policies. This supports the earlier findings of Bartlett and Chandler (1997) in respect of the audit report. There is also evidence to suggest that the mix and type of information these bankers are now using has changed since 1985. This may indicate a move toward a greater use of a going concern approach to lending decisions.

System and method of managing cash and suggesting transactions in a multi-strategy portfolio

Abstract: According to some embodiments of the present invention, there is provided a system for managing an investment portfolio that is associated with at least two investment strategies, at least one of the investment strategies providing a strategy change in respect of a non-cash position by explicitly or implicitly specifying a recommended change value for the non-cash position, the system comprising: a portfolio management processor, the portfolio management processor is responsive to the strategy change in respect of the non-cash position for calculating a cash allocation for a cash position of an investment strategy providing the change, wherein the cash allocation is based upon: a recommended relative weight for the cash position, the relative weight is provided explicitly or implicitly by the investment strategy providing the change, a relative weight of at least one other cash position, the relative weight is provided explicitly or implicitly by at least one other investment strategy with which the investment portfolio is associated, a specified proportion between the two or more investment strategies with which the investment portfolio is associated, and a value of a cash holding within the investment portfolio; and the portfolio management processor is further responsive to the investment strategy providing the change for calculating a suggested transaction based upon the change value specified explicitly or implicitly by the strategy providing the change in respect of the non-cash position, and based upon the cash allocation calculated for the cash position of the investment strategy providing the change.

Discussion of “Overinvestment of free cash flow”

Abstract: Richardson’s paper is a useful addition to the literature on the relationship between cash flow and investment. His approach to estimating this relationship is a new twist on earlier approaches. Like most of this literature, Richardson finds evidence that firms’ investment decisions are excessively sensitive to current cash flow, suggesting that violations of the Modigliani–Miller assumptions are empirically important. My view is that conceptual and implementation problems beset Richardson’s attempt to identify the specific violation of the Modigliani–Miller assumptions, and his evidence on this second point is not convincing.

The usefulness of corporate annual reports in South Africa: perceptions of preparers and users

Abstract: This article investigates the sources of financial information used for decisions regarding the buying, holding and selling of ordinary shares. The results of this questionnaire‐based study indicate that the main source of information used by those who prepare annual reports is stockbroker advice, whereas users of such reports prefer communication with management. Preparers of annual reports support the notion that annual reports are a useful source of information, but users prefer the preliminary announcement. Preparers read the income statement more thoroughly, while users read the cash flow statement more thoroughly. The article also provides information on the qualitative criteria used for assessing the usefulness of accounting practices, and some comments on the importance of setting standards and the objectives of the South African Statements of Generally Accepted Accounting Practice.

The Effects of Financial Constraints on Corporate Policies in Australia

Abstract: We jointly study the impact of financial constraints on Australian companies' investment decisions and demand for liquidity. By examining a large sample of Australian firms over the period 1990 to 2003, we find that financial constraints not only reduce the sensitivity of investment to the availability of internal funds, but also increase the responsiveness of cash holdings to internally generated cash flows. Further analysis shows that the impact of financial constraints varies across different cash flow states, i.e., financial constraints have a small effect on corporate investment and cash policies when cash flows are positive. In contrast, the severity of constraints is high in negative cash flow years in which the cost disadvantage of external finance coincides with deteriorating operating performance.

How Sensitive are Japanese Firms to Earnings Risk? Evidence from Cash Holdings

Abstract: We investigate the hypothesis that cash balances have a precautionary motive and serve to mitigate the volatility of operating earnings, which we use as a proxy for risk. Our results show that cash holdings are positively associated with firm level risk, but negatively related to industry risk. Consistent with previous findings, cash holdings are decreasing with the firm's size and debt ratio, and increasing with its profitability, growth prospects, and dividend payout ratio. The precautionary motive for holding cash is investigated by analyzing different cases under which cash shortfalls have different cost implications. The results show that keiretsu affiliated firms hold less cash and are less risk sensitive. There is also evidence that financial constraints reduce the incentives to mitigate earnings risk. Finally, we show that bank-controlled firms and highly leveraged firms increased their sensitivity to earnings volatility as the condition of Japanese banks deteriorated after 1998. Overall, our results strongly support the precautionary motive for holding cash and underline the importance of corporate risk mitigation.

Cash flow ratios as a yardstick for evaluating financial performance in African businesses

Abstract: Purpose – The purpose of this paper is to compare companies in a developing country with those of a first‐world country. For this purpose South African (SA) companies in the chemical, food and electronic industries are to be evaluated on the hand of cash flow ratios and compared with companies in the USA in similar industries.Design/methodology/approach – Giacomino and Mielke proposed nine cash flow ratios for performance evaluation. Ratios were calculated for companies in the USA in the chemical, food and electronic industries for 1986‐1988. Industry norms were calculated for the period, indicating that the potential existed to develop benchmarks for the ratios by industry. Jooste calculated cash flow ratios for listed companies in SA, similar to those calculated by Giacomino and Mielke. The results of the SA companies were then compared with the US companies.Findings – The comparison revealed some similarities and differences. The cash flow sufficiency ratio showed that the SA industries had enough cash...