Showing papers on "Cash flow statement published in 2011"
TL;DR: In this article, the authors developed a firm life cycle proxy using cash flow patterns, which provides a parsimonious indicator of life cycle stage that is free from distributional assumptions (i.e., uniformity).
Abstract: This study develops a firm life cycle proxy using cash flow patterns. The patterns provide a parsimonious indicator of life cycle stage that is free from distributional assumptions (i.e., uniformity). The proxy identifies differential behavior in the persistence and convergence patterns of profitability. For example, return on net operating assets (RNOA) does not mean-revert (spread of seven percent after five years between mature and decline firms) when examined by life cycle stage, which has implications for growth rates and forecast horizons. Further, determinants of future profitability such as asset turnover and profit margin are differentially successful in generating increases in profitability conditional on life cycle stage. Finally, investors do not fully incorporate the information contained in cash flow patterns and as a result, undervalue mature firms. The cash flow proxy is a robust tool that has applications in analysis, forecasting, valuation, and as a control variable for future research.
566 citations
TL;DR: In this article, the authors examine how verification of financial statements influences debt pricing and find that audited firms have a significantly lower cost of debt and that lenders place more weight on audited financial information in setting the interest rate.
Abstract: I examine how verification of financial statements influences debt pricing. I use a large proprietary database of privately held U.S. firms, an important business sector in which the information environment is opaque and financial statement audits are not mandated. I find that audited firms have a significantly lower cost of debt and that lenders place more weight on audited financial information in setting the interest rate. Further, I provide evidence of a mechanism for this increased financial statement usefulness: accruals from audited financial statements are better predictors of future cash flows. Collectively, I provide novel evidence that audited financial statements are more informative and that this significantly influences lenders’ decisions.
481 citations
TL;DR: The authors found that deteriorating earnings quality is associated with higher idiosyncratic return volatility over 1962-2001, and the results are robust to controlling for inter-temporal changes in the disclosure of value-relevant information, sophistication of investors and the possibility that earnings quality can be informative about future cash flows.
394 citations
TL;DR: In this paper, the authors examined the comparative abilities of current period cash flows and earnings (and its components) to predict one-year-ahead cash flow from operations in Egypt.
Abstract: Purpose – The purpose of this paper is to examine the comparative abilities of current period cash flows and earnings (and its components) to predict one‐year‐ahead cash flow from operations in Egypt.Design/methodology/approach – The study uses the cash flow prediction models developed by Barth, Cram, and Nelson to examine the predictive abilities of earnings and cash flows for future cash flows. The first set of prediction models uses cross‐sectional regression to compare the predictive abilities of cash flows and aggregate earnings for one‐year‐ahead cash flow from operations. The second set of prediction models tests whether disaggregating earnings into cash flows and the major components of accruals enhances the predictive ability of earnings for one‐year‐ahead cash flow from operations.Findings – The findings of the study reveal that aggregate earnings have superior predictive ability than cash flows for future cash flows. Also, the results reveal that disaggregating accruals into major components – ...
256 citations
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TL;DR: Investment-cash flow sensitivity has declined and disappeared, even during the 2007-2009 credit crunch as discussed by the authors, and the decline and disappearance are robust to considerations of RD and remain a puzzle.
Abstract: Investment-cash flow sensitivity has declined and disappeared, even during the 2007-2009 credit crunch. If one believes that financial constraints have not disappeared, then investment-cash flow sensitivity cannot be a good measure of financial constraints. The decline and disappearance are robust to considerations of RD and remain a puzzle.
246 citations
TL;DR: In this paper, the authors investigated the determinants of corporate cash holdings in Canada and found that market-to-book ratio, cash flow, net working capital, leverage, firm size, board size, and the CEO duality significantly affect the corporate cash holding in Canada.
Abstract: The purpose of this study is to investigate the determinants of corporate cash holdings in Canada. This study also seeks to extend the findings of Afza and Adnan (2007). A sample of 166 Canadian firms listed on Toronto Stock Exchange for a period of 3 years (from 2008-2010) was selected. This study applied co-relational and non-experimental research design. The results show that market-to-book ratio, cash flow, net working capital, leverage, firm size, board size, and the CEO (chief executive officer) duality significantly affect the corporate cash holdings in Canada. This study contributes to the literature on the factors that determine the corporate cash holdings. The findings may be useful for the financial managers, investors, and financial management consultants.
165 citations
TL;DR: In this article, the authors used a sample of restatement firms and a meet-or-beat model to classify firms as making discretionary accounting choices for opportunistic meet-and-beat (OP-MB) reasons, and found that originally reported earnings and accrual components are less predictive of future cash flows relative to the restated numbers.
Abstract: Using a sample of restatement firms and a meet-or-beat model to classify firms as making discretionary accounting choices for opportunistic meet-or-beat (OP-MB) reasons, we show that originally reported earnings and accrual components are less predictive of future cash flows relative to the restated numbers. We find the opposite is true for firms classified as making discretionary accounting choices for non-OP-MB reasons. We consider a number of competing explanations for these latter results. Our findings are most consistent with the informational hypothesis, weakly consistent with conservative-motivated efficient contracting choices, but inconsistent with opportunistic contracting and misapplication/errors of GAAP explanations.
142 citations
TL;DR: This article examined the relationship between firm-level corporate governance mechanisms and cash holdings; along with their combined effects on firm value for a sample of firms listed in Singapore and Malaysia, and found that firms with less effective governance attributes are found to be more inclined to accumulate cash than those with more effective governance.
Abstract: This paper examines the relationships between firm-level corporate governance mechanisms and cash holdings; along with their combined effects on firm value for a sample of firms listed in Singapore and Malaysia. Firms with less effective governance attributes are found to be more inclined to accumulate cash than those with more effective governance. The results support the flexibility hypothesis in that an increase in agency conflicts between managers and minority shareholders leads to entrenched managers having more discretion to hoard cash reserves. In addition, the incremental value of holding excess cash is shown to be negative for firms with a single leadership structure, firms with a pyramidal ownership structure, as well as family-controlled firms. The discounts associated with these firms may reflect investors’ recognition of the possibility of managerial entrenchment.
140 citations
TL;DR: In this paper, the authors developed a dynamic model of a firm facing agency costs of free cash flow and external financing costs, and derived an explicit solution for the firm's optimal balance sheet dynamics.
Abstract: We develop a dynamic model of a firm facing agency costs of free cash flow and external financing costs. An explicit solution for the firm's optimal balance sheet dynamics is derived. Financial frictions affect issuance and dividend policies, the value of cash holdings, and the dynamics of stock prices. The model predicts that the marginal value of cash varies negatively with the stock price, and positively with the volatility of the stock price. This yields novel insights on the asymmetric volatility phenomenon, on risk management policies, and on how business cycles and agency costs affect the volatility of stock returns
135 citations
TL;DR: In this paper, the authors examined the association between corporate governance and cash policy within family-controlled firms and found that the impact of corporate governance, with its separation of control rights and cash flow rights, and the proportion of independent directors on cash policy, differs between family controlled and non-family controlled firms.
124 citations
TL;DR: In this article, the authors proposed a continuous time, contingent claims framework using dividends, short-term borrowing and equity issues as controls to predict cash and leverage dynamics in a stock market.
Abstract: We solve for a Firm's optimal cash holding policy within a continuous time, contingent claims framework using dividends, short-term borrowing and equity issues as controls. In line with recent empirical research but in contrast with most of the contingent claims literature we assume mean reversion of earnings. The Firm's optimal cash holdings are a non-monotonic function of business conditions and an increasing function of the level of long-term debt. When earnings are quite high, there is a negative earnings sensitivity of cash holdings. The model matches closely a wide range of empirical benchmarks and predicts cash and leverage dynamics in line with the empirical literature. Firm value is quite insensitive to empirically observed levels of long-term debt. The optimal cash policy exhibits a state-dependent hierarchy that agrees with recent explorations of pecking order theory. The model also has interesting implications for the asset substitution hypothesis, and corporate hedging. Finally, we extend the model to include growth opportunities, and find that such opportunities will not greatly affect the cash holding policy of the Firm.
TL;DR: This paper examined the determinants of cash-holding levels for restaurant firms and found that restaurant firms with greater investment opportunities tend to hold more cash, at the same time, large restaurant firms, firms holding liquid assets other than cash, firms with higher capital expenditures, and firms paying dividends were shown to hold less cash.
TL;DR: In this paper, the authors posit that accounting conservatism could mitigate the value destruction associated with increases in cash holdings, and they find that the market value of an additional dollar in stock holdings increases in accounting conservatism.
Abstract: We posit that accounting conservatism could mitigate the value destruction associated with increases in cash holdings. Consistent with this conjecture, we find that the market value of an additional dollar in cash holdings increases in accounting conservatism. This result is robust to controlling for strength of corporate governance, earnings quality, past stock performance, potential unobserved firm heterogeneity, potential endogenous changes in conservatism, and other relevant variables. Overall, the evidence suggests that accounting conservatism is associated with a more efficient use of cash holdings, supporting the notion that accounting conservatism can serve as a substitute for external monitoring and reduce agency conflicts between managers and shareholders.
TL;DR: In this article, the authors examine the determinants of corporate cash management policies across a broad sample of international firms and find that firms in countries with strong legal protection of minority investors are more likely to decrease their cash holdings in response to an increase in cash flow than are firms in country with weak legal protection.
TL;DR: In this article, the authors investigated the relationship between cash conversion cycle and levels of liquidity, invested capital, and performance in small firms over time and found that firms with more efficient cash conversion cycles were more liquid, required less debt and equity financing, and had higher returns.
Abstract: This study investigated the relationship between cash conversion cycle and levels of liquidity, invested capital, and performance in small firms over time. In a sample of 879 small U.S. manufacturing firms and 833 small U.S. retail firms, cash conversion cycle was found to be significantly related to all three of these aspects. Firms with more efficient cash conversion cycles were more liquid, required less debt and equity financing, and had higher returns. The results also indicate that small firm owners/managers may be reactive in managing cash conversion cycle. The study highlights the importance of cash conversion cycle as a proactive management tool for small firm owners.
TL;DR: In this paper, the authors estimate a dynamic model that allows firms to adjust their cash holding levels over time and find evidence consistent with a trade-off type behavior in cash holding level.
TL;DR: In this paper, the authors examined whether the mandatory International Financial Reporting Standards (IFRS) regime has led to any significant reductions in overall financial reporting diversity by companies within the EU and Australia.
Abstract: According to the International Accounting Standards Board (IASB), International Financial Reporting Standards (IFRS) are intended to provide a common set of globally applicable accounting standards, having the ultimate aim of reducing international financial reporting diversity. Much previous research on standards harmonisation has been conducted on relatively small samples and in periods which pre-date the introduction of mandatory IFRS in the EU and Australia. Most of these studies have also relied on some form of indexing technique to measure harmonisation (such as the modified C-index) which have since been challenged in the literature. Based on a sample of 81,560 firm years, this study examines whether the mandatory IFRS regime has led to any significant reductions in overall financial reporting diversity by companies within the EU and Australia. Financial reporting diversity is proxied by the variability of several balance sheet, income statement and cash flow statement ratios measured over the pre-IFRS and post-IFRS periods. Variability is measured by the coefficient of variation (CV), a scale neutral measure of dispersion of a probability distribution. This measure avoids many of the methodological problems associated with index techniques. Notwithstanding some mixed findings, the group mean comparisons and multiple regression results indicate some statistically significant reductions in the variability of ratio measures in the post-IFRS period, even after controlling for factors such as firm size, industry and adoption status (whether a country is an IFRS adopter or not). While the results should be viewed as preliminary, they provide some tentative support for IASB’s current policy direction towards global accounting standards convergence (for instance, the IASB–FASB convergence project). The results also have implications for other countries contemplating a shift to IFRS, such as the United States and several Asian nations, including Japan and India. A useful direction for future research is to determine whether the same results hold using a more extensive post-IFRS sample.
TL;DR: In the early 1990s, the Australian government adopted the Australian Accounting Standards (AAS) business-based system, with a few modest extensions covering the public sector as mentioned in this paper, but the AAS system was not appropriate for the Australian public sector and there was much controversy over the displacement of cash accounting and budgeting systems by accrual accounting.
Abstract: In May 2008, the Australian government presented its budget to parliament solely in terms of the IMF Government Finance Statistics (GFS) accounting system; and in December 2008 it announced that all outcome financial statements were also to be GFS based.
These two decisions brought to an end a long and arduous controversy over the use of accrual accounting by governments in Australia since their adoption the early 1990s. Initially, the Australian Accounting Standards (AAS) business-based system was adopted, with a few modest extensions covering the public sector. However, there was much controversy over the displacement of cash accounting and budgeting systems by accrual accounting; and secondly whether the AAS system was appropriate for the public sector.
In May 1999, the Australian government introduced accrual budgeting in place of cash budgets. However two sets of accrual budgets were presented to parliament—an AAS-based one and a GFS-based one. The two budgets presented substantially different results, causing endless confusion in parliament. Furthermore, departments and the whole of government continued to present only AAS outcome financial statements.
In this paper, the above history is traced out together with the reasons for the decisions. The final decision to adopt the GFS system, covering both cash and accrual accounting systems, is explained in terms of the roles and operating environments of governments. These determine the financial information needs of government, and they are shown to be fundamentally different from those of business. Finally, the structure and concepts used in the GFS system are explained.
TL;DR: Wang et al. as discussed by the authors empirically tested the impact of family control, institutional environment and their interaction on the cash dividend policy of listed companies and found that family firms have a lower cash dividend payout ratio and propensity to pay dividends than non-family firms.
Abstract: Using a sample of 1486 Chinese A-share listed companies for the period 2004–2008, this study empirically tests the impact of family control, institutional environment and their interaction on the cash dividend policy of listed companies. Our results indicate that (1) family firms have a lower cash dividend payout ratio and propensity to pay dividends than non-family firms; (2) a favorable regional institutional environment has a significant positive impact on the cash dividend payout ratio and propensity to pay dividends of listed companies; and (3) the impact of the regional institutional environment on cash dividends is stronger in family firms than in non-family firms. Somewhat surprisingly, we find that controlling family shareholders in China may intensify Agency Problem I (the owner–manager conflict) rather than Agency Problem II (the controlling shareholder–minority shareholder conflict), and thus have a significant negative impact on cash dividend policy. In contrast, a favorable regional institutional environment plays a positive corporate governance role in mitigating Agency Problem I and encouraging family firms to pay cash dividends.
TL;DR: In this article, the authors investigated the effect of financial deepening on the relationship between trade credit and cash holdings among Chinese listed firms and found that firms in regions with higher levels of finance deepening hold less cash for payables while substituting more receivables for cash.
Abstract: This paper investigates the effect of financial deepening on the relationship between trade credit and cash holdings among Chinese listed firms. We first document an asymmetric effect of trade payables and receivables on cash holdings, in that firms hold an additional $0.71 of cash for every $1 of credit payable but use $1 of receivables as a substitute for only $0.15 of cash. We then find that firms in regions with higher levels of financial deepening hold less cash for payables while substituting more receivables for cash. A more highly developed financial sector helps firms to better use trade credit as a short-term financing instrument. Finally, we find that the ratio at which receivables are substituted for cash increased following the implementation of the new receivables pledge policy in 2007, which allowed firms to use receivables as security for loans. This policy event represents an exogenous shock that mitigates the endogeneity concern.
TL;DR: In this article, the authors estimate firms' cash flow sensitivity of cash to empirically test how the financial system's structure and level of development influence their financial constraints, and they find that both the structure of financial system and its level of developing matter.
TL;DR: In this article, the authors show that consumers' desire to monitor liquidity is one of the reasons why the share of cash transactions is still high in many countries, and they propose a theoretical framework which incorporates this feature of cash, and derives implications not only for cash usage as such but also for a broader set of payment-related activities.
Abstract: Standard transaction cost arguments can only partially explain why the share of cash transactions is still high in many countries. This paper shows that consumers’ desire to monitor liquidity is one of the reasons. Consumers make use of a distinctive feature of cash – a glance into one’s pocket provides a signal for both the remaining budget as well as the level of past expenses. We propose a theoretical framework which incorporates this feature of cash, and derives implications not only for cash usage as such but also for a broader set of payment-related activities. Survey data from Germany on consumers’ payment and withdrawal patterns are used to test these implications empirically. The data are consistent with all theoretical predictions: consumers who need to keep control over their remaining liquidity and who have elevated costs of information processing and storage will conduct a larger percentage of their payments using cash, hold fewer non-cash payment instruments, withdraw less often and hold larger cash balances than other consumers. Such consumers also use payment cards for some transactions; they switch to non-cash payment instruments only at higher transaction values than other consumers, however. Our model provides an explanation of why cash usage has declined only slowly in some countries despite broad diffusion of non-cash means of payment.
TL;DR: In this article, an analytically tractable two-period model of a financially constrained firm is used to derive an investment threshold that is U-shaped in cash holdings, where the firm balances financing costs for present and future investment, respectively.
TL;DR: In this article, the authors analyze the impact of replacing the SSAF (Statement of Sources and Applications of Funds) by the SCF (statement of Cash Flows), implemented through changes in Brazilian accounting standards valid for the financial year 2008.
Abstract: Over the past 40 years, several studies have discussed the relevance of accounting information. These are the so-called value-relevance studies of accounting information. In these studies, accounting variables are used to try and explain stock price behavior. The focus is to verify, through regression analysis, if certain accounting information has information contents for the capital market. That is the context for this article, which aims to analyze the impact of replacing the SSAF (Statement of Sources and Applications of Funds) by the SCF (Statement of Cash Flows), implemented through changes in Brazilian accounting standards valid for the financial year 2008. Therefore, it analyzes the question about the value relevance of the operational sources of funds (ORO) from SSAF and operating cash flow (FCO) from the SCF, for the years 2005 to 2007, of non-financial publicly-traded corporations listed in the database Melhores e Maiores of FIPECAFI-EXAME. Empirical evidence supports that the replacement of the SSAF by the SCF was beneficial for accounting information users in Brazil, although previous studies have pointed to the SSAF as a richer statement in terms of information, i.e. a statement that allows ursers to extract more information. A plausible explanation for this finding is that the SCF is na easier to understand and more user-friendly statement, especially for users who are less familiar with accounting, so that it is more used.
TL;DR: In this article, the authors investigated whether various partitions of earnings involving combinations of a cash flow measure of performance and measures of current accruals and non-current accrual improve the ability to explain market values in the UK relative to using earnings alone.
Abstract: Cash flow statements have a longstanding history as mandated financial statement disclosures, having replaced funds flow statements. The usefulness of such disclosures with respect to one of the main purposes of financial statements - providing information relevant to the assessment of future cash flows and their uncertainty, and the market value of firms - is still subject to debate. This study investigates whether various partitions of earnings involving combinations of a cash flow measure of performance and measures of current accruals and non-current accruals improve the ability to explain market values in the UK relative to using earnings alone. Using a valuation model-based methodology, and employing a UK sample of non-financial firms for the years 1993 to 2007, our results suggest strong support for the assertion that cash flows can have incremental value relevance relative to either earnings or funds flows. By implication, cash flows can have separate value relevance from total and, in particular, current accruals. There is slightly less consistent evidence that current and non-current accruals can have separate value relevance but, nonetheless, the results are still strongly in favour in this respect. Generally, the main source of increase in explanatory power for market values is the separate inclusion of our cash flow measure in the estimated regressions. As a consequence, we conclude that the statement of cash flows in the UK provides information useful to UK investors in valuing firms. Further, requiring a cash flow statement, as opposed to a funds flow statement, improves the information content of financial statements in the UK.
TL;DR: The Australian Accounting Standards Board and the Financial Reporting Standards Board (FRSB) have issued a joint proposal that will allow reporting entities to choose between the direct and indirect method of reporting cash flow statements as discussed by the authors.
Abstract: The Australian Accounting Standards Board (AASB) and the Financial Reporting Standards Board (FRSB) have issued a joint proposal that will allow reporting entities to choose between the direct and indirect method of reporting cash flow statements. This evidence presented in this paper indicates that the direct cash flow reporting format, relative to the indirect method, leads to better prediction of future firm performance and has a stronger association with share prices. The AASB and the FRSB have to decide whether to support high quality reporting or harmonisation.
TL;DR: In this article, the authors developed a panel vector autoregression model that accounts for firm-specific liquidity needs based on the cash conversion cycle and showed that firms experiencing liquidity shocks resort to cash or trade credit but not to bank finance.
Abstract: Since 1988, cash holding of UK listed companies increased from 10.6 to 16.4%. Focusing on the short-term view of cash holding and its substitutes, trade credit and short-term bank finance, the study develops a panel vector autoregression that accounts for firm-specific liquidity needs based on the cash conversion cycle. Impulse response functions confirm the signalling theory of trade credit and show that firms experiencing liquidity shocks resort to cash or trade credit but not to bank finance. Increasing cash improves access to trade credit. Additional cash or trade credit triggers a slowdown of the CCC, which could be explained by agency theory. Managers are reluctant to make the effort to improve working capital management if short-term funding is secured. The model can predict cash holding for the average firm; however, cash-rich firms cumulate more cash than predicted, which is due to an unexpected decline in bank finance and trade credit.
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TL;DR: In this paper, the authors investigated the relationship between the maturity of assets and maturity of their debts and found that firms with more short-term debt carry relatively smaller balances of cash.
Abstract: Several empirical studies have reported that the level of short-term financing is higher in firms operating in developing countries. Short-term financing increases risk of default as it matures quickly and leaves little room for the borrowing firm to manage its cash flows. But if the firm has a cash buffer, it can avoid such a risk. If firms in developing countries have higher level of short-term debts, do they carry larger cash balances too? Do firms in Pakistani match the maturity of assets with the maturity of their debts? In this study, we investigate these questions using a sample of 380 listed firms over a period of 1996 to 2008. The descriptive statistics show that cash-to-total assets ratio of the sampled firms is almost the same as reported in other empirical studies for developed countries such as US and UK. This finding raises an important question of how firms in Pakistan with more short-term financing carry relatively smaller balances of cash. As an answer, this study puts forward several explanations, which have important implications for capital market and firm financing. Results of panel data models indicate that cash-to-total assets ratio increases with growth opportunities, size of a firm, dividends ratio, and decreases with debt-maturity and conversion cycle. To allow for the possibility that cash-to-total assets ratio is adjusted gradually over time by firms in an attempt to reach optimal ratio, the study also employs a partial adjustment model by using the generalized methods of movements (GMM).
TL;DR: The authors investigated the relation between changes in cash dividend payments, non-public tradable shares, and the percentage of ownership of the controlling shareholder in Chinese firms before and after the split-share structure reform.
Abstract: We investigated the relation between changes in cash dividend payments, non-public tradable shares, and the percentage of ownership of the controlling shareholder in Chinese firms before and after the Split-share structure reform. We found a significant reduction in cash dividends before and after the reform. Importantly, the reduction in cash dividends was significantly related to the reduction in the largest shareholder’s ownership; however, not associated to the decline in non-publicly tradable shares. These results suggest that Chinese controlling shareholders’ preferences for cash dividends is attributable to the inherent illiquidity of their shares rather than non-tradability of shares.
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TL;DR: In this article, the relative predictive ability of earnings, cash flow from operations as reported in the cash flow statement, and two traditional measures of cash flows (i.e., earnings plus depreciation and amortisation expense, and working capital from operations) in forecasting future cash flows for Australian companies was examined.
Abstract: Purpose: This paper examines the relative predictive ability of earnings, cash flow from operations as reported in the cash flow statement, and two traditional measures of cash flows (i.e. earnings plus depreciation and amortisation expense, and working capital from operations) in forecasting future cash flows for Australian companies. Further, an empirical investigation of the extent to which firm size, as a contextual factor, influences the predictability of earnings and cash flow from operations is presented. Methodology: Our sample includes 323 companies listed on the Australian Stock Exchange between 1992 and 2004 (3,512 firm-years). We employ the ordinary least squares and fixed-effects approaches to estimate our regression models. To evaluate the forecasting performance of the regression models, both within-sample and out-of-sample forecasting tests are employed. Findings: We provide evidence that reported cash flow from operations has more power in predicting future cash flows than earnings and traditional cash flow measures. Further, the predictability of both earnings and cash flow from operations significantly increases with firm size. However, the superiority of cash flow from operations to earnings in predicting future cash flows is robust across small, medium and large firms.