Showing papers on "Operating cash flow published in 1997"

The Determinants and Implications of Corporate Cash Holdings

Abstract: We examine the determinants and implications of holdings of cash and marketable" securities by publicly traded U.S. firms in the 1971-1994 period. Firms with strong growth" opportunities and riskier cash flows hold relatively high ratios of cash to total assets. Firms" that have the greatest access to the capital markets (e.g. large firms and those with credit" ratings) tend to hold lower ratios of cash to total assets. These results are consistent with the" view that firms hold liquid assets to ensure that they will be able to keep investing when cash" flow is too low relative to planned investment and when outside funds are expensive. The" short run impact of excess cash on capital expenditures, acquisition spending and payouts to" shareholders is small. The main reason that firms experience large changes in excess cash is" the occurrence of operating losses. There is no evidence that risk management and cash" holdings are substitutes.

Corporate Cash Reserves and Acquisitions

Abstract: The acquisition behavior of cash-rich firms is examined for evidence of free cash flow-related behavior. A model of cash management is developed and used to identify a sample of cash-rich firms. The model provides a benchmark "normal" level of cash reserves based on industry characteristics and dynamic cash management over time. Cash-rich firms are found to be more likely to begin acquisitions, increase current acquisition spending, and engage in large acquisitions than the rest of the population of firms. In a multivariate setting, cash- richness is a strong predictor of acquisition likelihood, even controlling for sales growth and stock price performance. Additional tests support the free cash flow hypothesis over a hypothesis in which managers optimally stockpile cash before an acquisition. Among cash- rich firms, the decision to spend the cash on an acquisition rather than pay it out is strongly related to how well the agency conflict between managers and owners is controlled. Further, the abnormal return from an acquisition announcement is decreasing in the deviation of a firm's cash reserves from its predicted optimal level. Cash-rich firms are more likely to make diversifying acquisitions and their targets are less likely to attract other bidders. Overall, the evidence supports the explanatory power of the free cash flow hypothesis for the investment decisions of cash-rich firms.

Privatization and Restructuring in Central and Eastern Europe: Evidence and Policy Options

Abstract: This paper analyzes the financial and operating data (1992 to 1995) for more than 6,300 industrial firms in seven countries in Central and Eastern Europe--Bulgaria, Czech Republic, Hungary, Poland, Romania, Slovak Republic and Slovenia. The authors compare the extent of restructuring across firms in these countries to determine which country's policies are most effective in encouraging restructuring. The analysis examined the following measures of restructuring: a) profitability; b) proportion of firms with a positive operating cash flow; c) average operating cash flow as a percent of revenue; d) growth in labor productivity; e) growth in total factor productivity; and f) growth in exports. The authors next used econometric analysis to identify government policies that most encouraged firms to restructure. The study also found that privatization had a large impact on restructuring, but there was little difference in productivity between private firms in countries that used mass privatization methods and in the other countries which have used standard methods. The authors also examined the role of banks in the restructuring of firms. They concluded that recapitalizing banks to compensate for their bad loans and encouraging them to forgive bad loans is unlikely to help firms restructure very much. A safer course of action is to recapitalize banks only at the time of their privatization and after a large share of enterprises are privatized.

Cash Flow and Capital Spending: Evidence from Capital Expenditure Announcements

Abstract: Pecking-order and free-cash-flow behavior are two explanations for the reliance of US corporations on cash flow from operations to finance capital expenditures. However, each explanation has different implications for financial management; cash flow hoarding for the former and cash flow payout for the latter. The empirical findings in this article suggest that firm size plays a significant role in determining appropriate financial policy for corporations.

Method and apparatus that processes financial data relating to wealth accumulation plans

Abstract: A digital computer produces data corresponding to results of different financial plans. Contribution data corresponding to contributions to an account created under the plan are entered into the digital computer. The digital computer produces data representing after tax cost of interest for cash value loan amounts corresponding to cumulative cash values of an insurance contract issued based on the contribution. Then, the digital computer outputs data representing investment income derived from the cash value loan amounts less after tax cost of interest to a display device.

Privatization and Restructuring in Central and Eastern Europe: Evidence and Policy Options

Abstract: Bulgaria, the Czech Republic, Hungary, Poland, Romania, the Slovak Republic, and Slovenia. Because privatization methods show similar results, the extent of restructuring is compared across firms in the seven countries and used for determining which country.Measures of restructuring are examined, including profitability, proportion of the firms with a positive operating cash flow, average operating cash flow as a percent of revenue, growth of labor productivity, growth of total factor productivity, and growth of exports. Econometric analysis was also used to identify the government policies that most encouraged firms to restructure.

Interest Rate Risk Management

Abstract: This paper surveys the main concepts and techniques of recent developments in the modeling of the term structure of interest rates that are used in the risk management and valuation of interest-rate-dependent cash flows. These developments extend the concepts of immunization and matching to a stochastic interest rate environment. Such cash flows include the cash flows on assets such as bonds and mortgage-backed securities as well as those for annuity products, life insurance products with interest-rate-sensitive withdrawals, accrued liabilities for defined-benefit pension funds, and property and casualty liability cash flows.

Marketable Incentive Contracts and Capital Structure Relevance

Abstract: This article investigates the claim that debt finance can increase firm value by curtailing managers' access to "free cash flow." We first show that incentive contracts that tie the managers' pay to stockholder wealth are often a superior solution to the free cash flow problem. We then consider the possibility that the manager can trade on secondary capital markets. Liquid secondary markets are shown to undermine management incentive schemes and, in many cases, to restore the value of debt finance in controlling the free cash flow problem. THE FUNDAMENTAL INSIGHT OF the agency approach to corporate finance is that a firm's financial structure affects real decisions. While there is little doubt that financial policies have a variety of real effects, some classic agency models have recently been criticized for failing to allow management compensation to be jointly determined along with the firm's financial structure.1 The force of this critique is highlighted by analyses such as Dybvig and Zender (1991) and John and John (1993) in which management incentive contracts completely sever the link between a firm's real and financial policies, so that capital structure is either irrelevant or is determined solely by factors such as taxes. Management incentive schemes lead to capital structure irrelevance by motivating executives to make choices that maximize total firm value, regardless of the structure of claims on its cash-flows. Persons (1994) shows that this commitment role is undermined if shareholders are able to renegotiate man

A Description and Market Analysis of Write‐off Announcements

Abstract: This paper examines the stock market reaction to write-off announcements. The increasing prevalence of write-offs over the last decade has lead the Financial Accounting Standards Board to issue new guidelines on the accounting for write-offs, and there has been much discussion about the stock market reaction to these types of announcements. By focusing on the expected cash flow implications of the different types of write-off announcements, this paper documents that the stock price reaction to write-off announcements is associated with the expected cash flow implications of the events surrounding the write-off.

Financial Factors and Investment in Belgium, France, Germany and the Uk:A Comparison Using Company Panel Data

Abstract: We construct company panel datasets for manufacturing firms in Belgium, France, Germany and the UK, covering the period 1978-89. These datasets are used to estimate a range of empirical investment equations, and to investigate the role played by financial factors in each country. A robust finding is that cash flow or profits terms appear to be both statistically and quantitatively more significant in the UK than in the three continental European countries. This is consistent with the suggestion that financial constraints on investment may be relatively severe in the more market-oriented UK financial system.

Trade Credit, Cash-flow and SMEs in the UK, Germany and France

Abstract: DR. FRANCIS CHITTENDEN IS SENIOR FELLOW in Business Development and Director of Business Development Programmes at Manchester Business School and Richard Bragg is a Senior Lecturer in Law and Business, University of Manchester, England. This paper is based on the analysis of the detailed accounts of 1200 small firms in the United Kingdom and 250 business (each) in Germany and France. Following the recent policy debate, at both the national and European level, the main objective of the work was to assess the impact of late payment of suppliers' invoices on the operating cash flow of small businesses in order to achieve two major objectives first, given the existence of a 'finance gap' which acts as a barrier to the growth of many small firms, to quantify the scale of the impact of potential reductions in credit terms on business cash flows; second, to determine the proportions of small companies which would benefit or suffer from faster payments made by their customers and to their suppliers. The paper con...

Users' perceptions of the need for cash flow statements — Australian evidence

Abstract: Professional accounting bodies have endorsed claims of the need for cash flow information through their issuance of Standards on cash flow statements. Few empirical studies have tested the extent to which decision-makers actually use cash flow information. Whilst market-based studies have tested the reaction of the stock market to the release of cash flow information, they have not established the usefulness of cash flow information to financial statement users. Such a study is important not just for the signals it gives to regulators, but also by virtue of the importance those signals have for the preparers of accounting information. The academic and professional literature, identify four possible contributing factors of demand for cash flow information: (i) the limitations of conventional accrual accounting, (ii) dissatisfaction with the funds statement, (iii) relevance for users' decisions, and (iv) changes in the reporting environment. To determine the extent to which investors and creditors agreed wi...

'Minting' electronic cash

Abstract: Electronic equivalents of traditional cash payment systems are being launched worldwide. Electronic cash can combine the benefits of traditional cash with those of payment by debit and credit card, while circumventing both their shortcomings. As with traditional cash, electronic cash should have high acceptability and be suitable for low value payment from person to person. With the possible exception of online payment platforms such as the Internet, it is preferred that payments be verifiable offline, without the bank's involvement, for reasons of cost effectiveness and speed. To facilitate electronic cash payments over the phone and the Internet, physical proximity of payer and payee should not be necessary. Moreover, electronic cash should offer privacy of payments. In particular, payments by an honest payer should be untraceable, and information about transaction content should remain privy to payer and payee. Yet a payer ought to always be able to trace the payee; traceability suits electronic cash and is as open to extortion, money laundering, and bribery as a check or wire transfer. Lastly, as with payments by debit and credit card, electronic cash should be convenient to store and transport, while protecting users against loss, theft, and accidental destruction.

The role of cash flows and accruals in explaining security returns: evidence for the UK

Abstract: The assessment of earnings usefulness in returns studies has been at the forefront of accounting research since the seminal work of Ball and Brown (1968). Recently, regulatory bodies worldwide have paid increased attention to cash flow reporting. Empirical research provides evidence that earnings information dominates cash flows in market-based accounting research. This study extends the growing empirical literature on the association of earnings and cash flows with security returns. We hypothesize that the association of cash flows with security returns improves (i) the smaller the absolute magnitude of aggregate accruals, (ii) the longer the measurement interval and (iii) the shorter the firm's operating cycle. The dataset consists of all UK firms included in the Global vantage database for the period 1984–1992. This study provides evidence that cash flows play a more important role in the marketplace when the operating cycle, magnitude of accruals and the measurement interval are taken into considerati...

On the Motivation for Paying Scrip Dividends

Abstract: Firms in the United Kingdom that pay scrip (i.e., in stock) dividends do not appear to be following optimal dividend policies. Scrip dividends are not driven by tax considerations or cash shortages. The payment of scrip dividends exacerbates the agency costs of free cash flow.

Does Interperiod Income Tax Allocation Enhance Prediction of Cash Flows

Abstract: This paper investigates whether interperiod income tax allocation, a controversial accounting accrual, facilitates prediction of cash flows. Preparers of financial statements contend that interperiod tax allocation is too complex and costly. Similarly, users of financial statements, particularly financial analysts, often ignore deferred tax information in their assessments of solvency and corporate performance (White et al. 1994). The Financial Accounting Standards Board (FASB), however, maintains that non-allocation of a corporation's income tax expense hinders the prediction of its future cash flows. Our research contributes to this debate by performing an empirical verification of the usefulness of interperiod tax allocation in predicting cash flows. The hypothesized linkage between deferred taxes and future cash flows rests on a linkage between deferred taxes and future income tax payments. We first provide evidence that deferred tax information aids in predicting future tax payments. We then use Lorek and Willinger's (1996) multivariate cash flow prediction model as a benchmark model and provide evidence that the inclusion of deferred tax information enhances prediction of future operating cash flows. This is especially true when deferred tax amounts are large. Overall, our results are consistent with the FASB's view that interperiod tax allocation enhances the prediction of cash flows.

Information Provided by Accrual and Cash-Flow Measures of Operating Activities

Abstract: This article examines accrual and cash-flow measures useful for observing companies' financing, investing and operating activities. It addresses the information provided jointly by income and operating cash flow, and reveals that information provided by these accounting measures is dependent on their relative magnitudes. A consistent pattern of income in excess of operating cash flow, with both measures appropriately adjusted and scaled, indicates superior company growth. Income and cash-flow patterns are associated significantly with various company financing, investing and operating attributes. Empirical tests confirm that both income and operating cash flow are important for observing company performance and prospects when considered jointly and when interpreted with respect to accounting measurement theory. At least for many companies, the results do not support the conventional wisdoms that accounting measures of income and operating cash flow converge over long periods of time and that earnings provide a reliable basis for cash-flow prediction.

Impact of Earnings, Dividends and Cash Flows on Stock Returns: Case of Taiwan's Stock Market

Abstract: The study uses Taiwan's stock market, a newly developed market with different characteristics from that of the U.S., as an experimental case to examine the influences of the market's characteristics on the relationship between stock returns and fundamental accounting information, such as earnings, dividends and cash flows. The testing period is from 1990 to 1994, right after the promulgation of Taiwan's accounting standard for statement of cash flows in 1989. Similar to the findings of U.S. studies, the study shows that earnings data is key information for investors. Unlike the U.S. results, however, both operating income and non-operating income are positively related to stock returns. The usefulness of non-operating income to explain stock returns is due mainly to its recurrent characteristic in Taiwan. The market views non-operating income, mostly from disposal of real-estate and short-term equity investments, as a complementary factor to operating income. It is a possible common phenomenon in a booming economy. Unlike from the results of U.S. studies, Taiwan's stock returns are strongly associated with stock dividends. Cash dividends, however, are relatively less important information to the market. The fast booming economy as well as Taiwan's free tax rate on capital gains are the explanations for the different findings. The results also support McNicholes and Dravid's (1990) and etc. results that stock dividends may act as a signal for favorable future earnings. Examining the association between stock returns and cash flow information, the results indicate that stock returns are positively associated with cash flows from both operating and financing activities. The phenomenon implies that the market appreciates not only the cash inflows from operating activities, but also cash inflows from new issues of bonds or stocks for further expansion. It is consistent to Taiwan's booming economy. The finding also supports Ross (1977) and Leland and Pyles' (1977) signaling hypothesis. The study concludes that the relationships between stock returns and fundamental variables are subject to the market's characteristics. The case of the Taiwan stock market shows that usefulness of accounting information depends upon the different roles of the information in the tested market. The results of the study also indicate that directly applying the U.S. experiences without any adjustment may cause incorrect conclusions for empirical studies.

Securitization: a low-cost sweetener for lemons

Abstract: Since the launching of the mortgage backed market in the early 1970s, securitization has experienced extraordinary growth and spread to a remarkable variety of receivables. But financial economists in the tradition of Miller and Modigliani have been hard pressed to explain such growth. When viewed within the context of an M & M world of “perfect markets,” securitization appears to be simply another way—and a highly complex and costly one, at that—for a company to carve up its operating cash flows and repackage them for investors. This article seeks to explain the growth of securitization by identifying reductions in costs that M & M assume out of existence. For some types of companies, the largest sources of the cost savings are fairly obvious. Most mortgage securitizations are effectively subsidized by the U.S. government, which contributed greatly to the launching of the securitization movement. And commercial banks forced to meet regulatory capital requirements have found securitization of loans to be a low-cost compliance strategy. But securitization appears to offer more than regulatory benefits. For example, higher rated companies with a variety of financing options appear to use securitization to diversify their funding sources and arbitrage small price differences in financial markets. But if such arbitrage profits can be significant, the non-regulatory benefits appear to be largest for companies with few financing alternatives—those firms that face what economists refer to as a “lemons problem.” Available information about such companies is often limited (as in the case of smaller companies), unfavorable (companies in financial distress), or particularly difficult to appraise (companies in volatile industries, or facing unstable political environments or potentially large liabilities). Especially in the case of such “lemons” companies, securitization may reduce overall financing costs by carving up the evaluation of a company's securities into tasks amenable to greater specialization. In so doing, it may reduce aggregate information costs for all its securities and thus increase total value.

Small hospitals with positive cash flow: why are they winners?

Abstract: This study evaluates the cash flow performance of hospitals that are at a greater risk of closure, specifically small hospitals. Sampling the majority of small acute-care hospitals in the United States, the study evaluates urban and rural small hospitals with positive cash flows for four consecutive fiscal periods and compares them with urban and rural hospitals with consecutive negative cash flows. In both urban and rural settings, positive cash flow small hospitals operate under a not-for-profit form of ownership and have lower operating costs, a faster collection of receivables. They also own newer, larger facilities, possess a Medicare higher case mix index, and offer more services in markets with lower per capita income.

Looking Forward: The Role for Government in Regulating Electronic Cash

Abstract: In his 19th century novel, Looking Backward, Edward Bellamy described a man who falls asleep in Boston in 1887 and awakens in the year 2000 to find that the United States has evolved into a utopian society. No longer are paper or metallic currency in circulation. Instead people pay for everything with paperboard cards that carry a certain value in dollars. To make a purchase, a person need only hand the card to the merchant, who deducts the purchase's value from the card (Bellamy). Although Bellamy's cashless society is not yet a reality, in some ways Bellamy was unusually prescient. With the year 2000 rapidly approaching, the cards he imagined, which are already popular in some countries, are being introduced into the United States by private companies. Now, though, they are called stored-value cards and are made of plastic. Stored-value cards are one form of electronic cash-electronic substitutes for paper currency. Digital cash (also known as cybercash or ecash) is the other form of electronic cash coming into use today. It consists of bits and bytes in cyberspace and substitutes for paper currency in transactions made over the Internet. Someday privately issued electronic cash may be a common means of payment in the United States. Looking forward to that day, government policymakers need to assess the impact these new forms of currency might have on the nation's currency stock. If privately issued electronic cash, once commonplace, could threaten the long-standing safety, uniformity, and relative stability of the U.S. currency, then policymakers must decide what, if any, forms of government intervention are appropriate. This article argues that there is a limited role for government in ensuring the quality of the nation's currency when private issuance is allowed. It first describes the emerging forms of electronic cash and how they differ from today's paper currency. It goes on to argue that the concern for policymakers is not that electronic cash is electronic, but rather that private firms are issuing it. The article then looks forward from the perspectives of economic theory and economic history to the impact privately issued electronic cash might have on the nation's currency and to the potential role for government. From the perspective of economic theory, how well the market will do at ensuring the currency stock's quality depends in part on the degree of substitutability of electronic-cash products for one another. While theory is silent on how substitutable such products will be in practice, the economy's historical experience with privately issued paper currencies provides insight into what might happen if electronic cash is privately issued and how market institutions might interact with various government regulations. Finally, the article considers some specific regulatory alternatives for ensuring that the U.S. currency remains stable, safe, and uniform. I. WHAT IS ELECTRONIC CASH? The use of electronic methods of payment is widespread today. General credit cards, which have been around in some form since 1949, were used for $662 billion in purchases in 1996, up 13.4 percent from 1995 (Mandell; The Nilson Report). Debit cards, first introduced in the 1970s, are now rapidly gaining favor with consumers. Even some elementary school students are now using them to buy their lunches (Block). In 1996 there were 1.45 billion Visa or MasterCard debit-card transactions, involving $45.81 billion in purchases, a 76 percent advance from 1995 (The Nilson Report). Automatic payments to and from checking accounts also are in widespread use. People can have their paychecks deposited directly into their bank accounts, and can have funds withdrawn automatically to purchase mutual fund shares or pay their utility bills. Most million-dollar transactions are conducted electronically as well.1 Stored-value cards Electronic substitutes for cash are the newest electronic means of payment. …

Determinants of Intercorporate Shareholdings

Abstract: This paper examines why firms choose to spend resources on acquiring ownership rights in other firms. Based on a unique data base of every individual intercorporate shareholding on the Oslo Stock Exchange during the period 1980-1994, we find that such investments serve at least three functions. First, they play a role in corporate governance, as managers in firms with low insider holdings, diffuse ownership structure, and high free cash flow tend to mutually acquire equity stakes in each other, possibly in a collective attempt to protect their human capital in the market for corporate control. Second, interfi rm equity holdings serve as financial slack for growing firms, reducing potential adverse selection costs by providing an internal funding source for new investments in long-term assets. Finally, our findings also suggest that intercorporate shareholdings are an integrated part of the investor's cash flow management system by being a liquidity buff er when cash inflows and cash outflows are non-synchronous.

Debt and Corporate Performance: Evidence from Unsuccessful Takeovers

Abstract: This paper examines how debt affects firms following failed takeovers Using a sample of 573 unsuccessful takeovers, we find that, on average, targets significantly increase their debt levels Targets that increase their debt levels more than the median amount reduce their levels of capital expenditures, sell off assets, reduce employment, increase focus and increase their operating cash flows These leverage-increasing targets also realize superior stock price performance over the five years following the failed takeover In contrast, those firms that increase their leverage the least show insignificant changes in their level of investment and their operating cash flows and realize stock price performance that is no different than their benchmarks Those failed targets that increase their leverage the least, and fail to get taken over in the future, realize significant negative stock returns following their initial failed takeovers The evidence is consistent with the hypothesis that debt helps firms remain independent not because it entrenches managers, but because it commits the manager to making the improvements that would be made by potential raiders

The relationship between cash flow and investment in the United States at business cycle frequencies

Abstract: (1997). The relationship between cash flow and investment in the United States at business cycle frequencies. Applied Economics: Vol. 29, No. 10, pp. 1283-1293.

Determinants of the stock price reaction to leveraged buyouts

Abstract: This paper investigates the determinants of leveraged buyout activity through the use of an abnormal return premium from the time of the first announcement through the final trading day. Consistent with the free. cash flow theory, firms with either high free cash flow or low Tobin’s q have higher abnormal returns. However, the returns to firms with both high free cash flow and low Tobin’s q are lower than firms with just one of these characteristics. Firms which substantially increase leverage and management buyouts with high insider ownership prior to the buyout have lower abnormal returns. Firms with lower risk, and therefore greater debt capacity, have higher abnormal returns.

Internal Capital Markets and Investment: Do the Cash Flow Constraints Really Bind?

Abstract: Lament (1997) claims to find evidence of credit market imperfections that distort financing and investment decisions of a sample of oil-dependent firms, as investment by nonoil units fell when oil cash flow dropped. However, a simple test reveals that few of these firms behaved in a fashion consistent with binding cashflow constraints. In addition, most were cash rich. The data provide strong evidence against the hypothesis that investment decisions by nonoil units were significantly affected by oil cash flow, or that credit market imperfections are an important factor for this set of firms.