Aggregate Cash Research Articles

International Financial Reporting Standards and the Macroeconomy

ABSTRACT Using a generalized aggregate-level difference-in-differences analysis across 32 countries over the 1991–2017 period, we find that the ability of aggregate earnings to predict one-year ahead GDP growth is greater for countries that adopted International Financial Reporting Standards (IFRS) than those that did not. IFRS adoption also enables aggregate earnings to better predict growth in GDP components and related factors. We show that aggregate accruals drive this effect, not aggregate cash flows. The mechanism for the enhanced predictive ability of IFRS-based aggregate earnings for future GDP growth is due to fair value-based accruals, which we proxy with IFRS-driven special items. In additional analyses, we find that our main results are stronger for adopting countries with greater differences between local accounting standards and IFRS and robust to controls for enforcement. Our findings suggest that IFRS adoption improves aggregate earnings’ ability to reflect fundamental economic news in a timely manner. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: E01; F00; M41; O50.

Management Practices and Economic Contribution of Eucalypts Woodlots to the Rural Household Livelihoods: The Case of Cheha District, Southern Ethiopia

In Ethiopia rural households growing Eucalypts at farm level in the form of woodlot become popular and Eucalyptus woodlot products play a significant role in household economy in particular and economic development of the nation in general. This study was conducted in Cheha districts in the Guraghe zone to assess the farmers’ management practices and analyze the socioeconomic contribution of Eucalypts woodlot to the livelihood of the rural households in the area. Economic data was collected by employing a formal survey using a structured questionnaire. Woodlot inventory was conducted on farmers’ eucalyptus woodlots to identify the existing trees' frequency distribution by diameter classes that indicated economic value. The latest version of Stata, version 13, SAS version 9.1, sigma plot version 12, and Microsoft Excel were used to analyze the data. The result of the study revealed that most of the sampled farmers in the study area had Eucalypts woodlot, targeting either to earn more income or to increase the productivity of the land which has denied growing cereal crops and pastures. Most of the farmers considered Eucalypts as one of the major sources of income and risk aversion. Excluding household consumption, the aggregate cash income contribution of Eucalypts woodlot products to rural households was more than 34% for midland and 37% for highland agro-ecologies. Further studies are needed on the management aspect of Eucalypts woodlots for the productivity of allocated land.

Corporate cash and governance: A global look into publicly-traded companies' aggregate cash ratios

I conduct international panel-data regressions to investigate the determinants of cash holdings by publicly-traded firms for 20 countries over the period 2007–2017. The precautionary, transaction-costs, and agency motives explained ratios of the firms' aggregate cash to their total assets. On the last motive, higher cash ratios were associated with managers with worse ethical behavior, lower accountability, weaker investor protection, harsher auditing and reporting standards, and greater potential to face holdup problems by lending banks. The agency motive had a greater marginal impact than the precautionary and transaction-costs motives while having a limited explanatory power over total variation in the cash ratios.

Cash conversion cycle and aggregate stock returns

In this paper, we empirically evaluate U.S. market return predictability based on an aggregate measure constructed from the bottom-up firm-level cash conversion cycle (CCC) for 1976–2018. We show that in sharp contrast to previous firm-level evidence, the aggregate CCC is a strong positive predictor of the aggregate stock market return both in- and out-of-sample and outperforms a series of well-known return predictors documented in the literature. In addition, the aggregate CCC can predict cross-sectional stock portfolio returns sorted by size, value, momentum, firm-level CCC, and industry and generate substantial certainty equivalent gains associated with a market-timing strategy. Further analysis reveals that the economic source of the predictive power predominantly originates from misvaluation induced by investors’ biased beliefs about future aggregate cash flows, i.e., the cash-flow channel.

Comparing GAAP With NIPA Earnings

The U.S. Bureau of Economic Analysis produces a measure of aggregate corporate profits (national income and product accounts [NIPA] earnings), which is an integral component of the accounting for gross domestic product (GDP). Interesting features of NIPA earnings include consistent accounting rules over time and determination with little or no managerial discretion. Thus, NIPA earnings provide a useful benchmark for generally accepted accounting principles (GAAP) earnings, especially in parsing out the effects of real-economy versus the accounting in explaining the documented temporal increase in volatility and decline in persistence of GAAP earnings. We find that GAAP and NIPA earnings are closely related in the early years, with similar means and standard deviations, and with earnings changes correlating at .90 during 1950-1983. This close relation substantially deteriorates, however, during the second half of the sample period, 1984-2016. Although the behavior of NIPA earnings remains roughly the same, the volatility of GAAP earnings increases 10-fold, and the correlation between GAAP and NIPA earnings changes falls to .39. Additional tests reveal that the increase in the volatility of GAAP earnings is mostly due to rapid earnings reversals, especially the effect of large transient items during economic downturns. The frequency and severity of such downturns, however, are roughly the same across the two periods. In addition, there is little change in the properties of aggregate cash flow from operations and revenue over time. Overall, this evidence suggests that in addition to changes in the real economy, changing GAAP rules and their application are significant factors in the changing properties of GAAP earnings.

Country-level analyst recommendations and international stock market returns

Abstract This study defines the aggregate analyst recommendation for a country as the value-weighted average of all outstanding recommendations for shares of firms incorporated in that country. We show that country-level analyst recommendations predict international stock market returns. A trading strategy based on country-level recommendations yields an abnormal return of around 1% per month. Aggregate recommendations also help to predict changes in gross domestic product and aggregate earnings surprises. Overall, we find that country-level analyst recommendations provide useful information to predict future aggregate cash flows and associated market returns across different countries.

What do movements in financial traders’ net long positions reveal about aggregate stock returns?

Previous financial economics studies have successfully identified the existence of informed trading in futures markets; however, there is no study on the specific type of strategy chosen by informed agents to maximize profits. To fill this gap in the literature, we investigate the importance of movements in futures traders’ net long positions in predicting aggregate equity market returns. This study finds that movements in the net long positions of bond, commodity, and stock futures traders are strong predictors of aggregate stock returns as they outperform a large number of popular return predictors both in and out of sample. In addition, a one-standard-deviation change in futures traders’ net long positions can lead to an increase (decrease) of up to 3.4% (4.12%) in annualized market excess equity returns. The study’s first-order autocorrelation results reveal an absence of persistence in the net long predictors. A vector autoregression decomposition shows that the economic source of financial traders’ net long position predictive power stems predominantly from the discount rate and cash flow channels. Overall, the study finds that financial traders are informed traders who are able to anticipate future aggregate cash flows and associated discount rate news.

The Evolution of Corporate Cash

In a study published recently in the Review of Financial Studies, the authors examine and then attempt to explain the considerable variation in the cash‐to‐assets ratios of U.S. public companies over a nearly 100‐year period. For example, between 1920 and 1945, the average cash holdings of both small and large U.S. companies tripled. By 1970, however, the cash levels of both had fallen back to their starting point in the early 1920s. Then, at the start of the 1980s, the cash policies of small and large companies began to part ways. Thanks to the very large cash holdings of the wave of companies that went public during the next two decades, the average corporate cash ratio increased sharply from 1980 to 2000—a period when the cash holdings of large, established U.S. companies remained largely unchanged. But since 2000, it has been the large U.S. companies—many of them multinationals with profits “trapped” overseas—that have experienced the largest increase in cash holdings.The authors find especially compelling evidence that the significant increase in average cash holdings from 1980 to 2000 was driven primarily by a “Nasdaq effect” in which a large number of firms went public on the Nasdaq while holding amounts of cash that increased steadily throughout this 20‐year period. This Nasdaq effect was most pronounced among unprofitable, largely debt‐free, high‐growth, and high‐volatility firms, most of which operated in the healthcare or high‐tech industries. And this trend may well continue in the future, given recent reports of a growing fraction of IPOs by companies that have yet to show profits.But along with and apart from this “Nasdaq” effect, the authors also find that for NYSE companies, the sensitivities of company‐specific cash holdings to commonly studied variables have been remarkably stable during the past 90 years. The kinds of companies that have operated with high cash‐to‐assets ratios in recent years—riskier companies with growth opportunities and little if any profits or use of debt—have had large cash holdings in nearly every decade during the last century. And as in the past, relatively low‐growth and low‐risk public companies producing steady income have continued to operate with lower levels of cash.But even with this relative stability of firm‐specific cash sensitivities, the authors do not find changes in corporate characteristics helpful in explaining the changes in aggregate cash holdings over time, particularly the large increases during the 1930s and early '1940s, and the period since 2000. The largest roles in such increases appear to have been played by macroeconomic factors, such as the level of general economic growth and its effect on corporate profitability and investment. Nevertheless, in recent times, even after taking these macro and micro factors into account, the authors' study provides clear evidence that the repatriation tax incentives (that were recently eliminated by the 2018 tax legislation) have played the largest role in the increase in aggregate corporate cash holdings that has taken place since 2000. With the recent elimination of such incentives, the cash holdings of large multinationals are likely to fall toward pre‐2000 levels.

Partisan Conflict, Policy Uncertainty and Aggregate Corporate Cash Holdings

This paper distinguishes political uncertainty from policy uncertainty shocks and uncovers new empirical facts about how each impacts the aggregate cash holdings of US firms. Our baseline structural vector autoregression model shows that an exogenous one standard deviation shock to political and economic policy uncertainty is followed by a 1 and 1.8 percent increase in aggregate corporate cash-to-total assets after five and eight quarters, respectively. The baseline result also shows that policy uncertainty shocks tend to raise financial market volatility while political uncertainty shocks tend to lower financial market volatility. Moreover, we find evidence that political uncertainty exerts asymmetric effects on aggregate corporate cash holdings, with a shock tending to raise cash holdings under normal financial conditions and lower cash holdings under tight financial conditions. Our main results are robust against a wide range of shock identification schemes as well as against parametric and non-parametric model estimations.

Partisan conflict, policy uncertainty and aggregate corporate cash holdings

This paper distinguishes political uncertainty from policy uncertainty shocks and uncovers new empirical facts about how each impacts the aggregate cash holdings of US firms. Our baseline structural vector autoregression model shows that an exogenous one standard deviation shock to political and economic policy uncertainty is followed by 1 and 1.8% increase in aggregate corporate cash-to-total assets after five and eight quarters, respectively. The baseline result also shows that policy uncertainty shocks tend to raise financial market volatility while political uncertainty shocks tend to lower financial market volatility. Moreover, we find evidence that political uncertainty exerts asymmetric effects on aggregate corporate cash holdings, with a shock tending to raise cash holdings under normal financial conditions and lower cash holdings under tight financial conditions. Our main results are robust against a wide range of shock identification schemes as well as against parametric and non-parametric model estimations.

Beliefs, Portfolio Constraints, Speculation and Asset Pricing: A General Equilibrium Analysis

This paper studies the interaction of borrowing and short-sale constraints and their ultimate effects on asset pricing properties in a simultaneous presence of the constraints in a dynamic general equilibrium model with heterogeneous risk aversions and heterogeneous beliefs in the aggregate cash flow growth. The constraints negate the binding of each other, and hence they virtually never bind at once. Instead, there exist clear regions with alternative binding modes of the constraints with different constraints more likely to bind in different states of economy. The borrowing constraint is more active in bad times and the short-sale constraint is so in good times. The constraints bind intermittently—alternately at times—in transitory states of economy where their relative strength is balanced. Qualitatively matching empirically documented patterns of asset prices, I find that the constraints moderate their price effects but amplify their negative volatility effects, thereby can help curb the market volatility. However, a motive for speculation, featured by a speculative premium, arises due to any constraints, and thus can exist in any states of economy, not only in good times.

The Evolution of Corporate Cash

We put the recent increase in corporate cash in historic perspective by studying nearly 100 years of average and aggregate cash holdings. Corporate cash more than doubled in the first 25 years of our sample before returning to 1920 levels by 1970. Since then, average and aggregate patterns diverge. To understand these patterns, we examine both time-series and cross-sectional variation in cash policies and draw several conclusions. First, the increase in average cash ratios since 1980 is driven entirely by a shift in the cash policies of new entrants, while within-firm changes have been negative or flat since WW II. Second, the cross-sectional relations documented on modern data are remarkably stable back to the 1920s. Third, despite the stability of these relations, firm characteristics explain little of the time series variation in aggregate cash holdings over the century. Macroeconomic conditions, corporate profitability and investment, and (since 2000) repatriation tax incentives help fill this gap.

Leading indicator variables and managerial incentives in a dynamic agency setting

This paper studies, in a dynamic agency setting, how incentives and contractual efficiency are affected by leading indicators of firms’ future financial performance. In our two-period model, a leading indicator variable provides a noisy forecast of the uncertain return from the manager’s long-term effort, and both contracting parties cannot refrain from renegotiating contract terms based on updated information. We find that the leading indicator can reduce the manager’s long-term effort incentive, as it allows the firm owner to capture more of the resulting return through renegotiated wages (i.e., the manager is held up). By reducing the uncertainty about future aggregate cash flows, the leading indicator also exacerbates the “ratchet” effect and discourages the manager’s short-term effort. In equilibrium, as the leading indicator becomes more accurate in forecasting future cash flows, the first-period contract attaches higher explicit weights to both the forward-looking leading indicator and backward-looking cash flow, and yet the manager may find it optimal to reduce both the short- and long-term efforts. We further show that with a more accurate leading indicator variable, the explicit incentive on the lagging cash flow may increase more than that on the leading indicator, and the equilibrium firm profit may decrease and diverge from the manager’s equilibrium efforts.

Equity Values and Prediction of Earnings with Disaggregation of Earnings in India

This article examined the relative performance of aggregated and disaggregated earnings for valuation of equity and prediction of earnings in India. We measured three levels of earnings disaggregation: aggregate earnings, total accruals and cash flows, and four major constituents of accruals, then we estimated pooled as well as individual industry-wise regressions. We adopted Barth, Beaver, Hand and Landsman’s (1999, Review of Accounting Studies, 4(3, 4), 205–229; 2005, Journal of Accounting, Auditing & Finance, 20(4), 311–345) linear information structure grounded on generalized version of Ohlson (1999) model. We compared our results with the studies based on developed market. Our findings say that aggregated earnings and its disaggregated components are value relevant, and the adjusted R-squares of every next disaggregated systems are higher than aggregated systems, but in varying range across industries. We also find that the investors are not capable of judging total accruals and cash flows separately for investment decisions in this emerging market.

Treasury Can Close a Potential Loophole in the Treatment of Deferred Foreign Income in the Tax Cuts and Jobs Act Will It Act?

This paper points out a potential TJCA loophole allowing a reduction in aggregate foreign cash subject to the 15.5% rate unless Treasury takes steps to implement an anti-abuse rule. If Treasury does not act, aggressive taxpayers may be rewarded and cautious taxpayers may have incentives to make second-best uses of their offshore cash. This potential loophole can have material revenue consequences and is an example of the costs of rushed legislative consideration of tax legislation without adequate time to review and analyze bill text.

Imputation tax system, dividend payout, and investor behavior: Evidence from the Taiwan stock exchange

Abstract This paper examines the change in corporate dividend policy and investor behavior in relation to the introduction of the imputation tax system in Taiwan. However, the findings of this study are unlike those of previous studies. Stock dividends are treated as a dividend for taxation purposes and represented the dominant payment mechanism in Taiwan before 1997. By contrast, both the number of firms paying cash dividends and aggregate cash dividend payments increase after the introduction of the imputation tax system. Consistent with the tax preference for the distribution of dividends, a higher level of tax deductible rate was associated with a higher cash dividend payout ratio. Domestic individual investors have been the only shareholders affected by the introduced dividend imputation, whereas the percentage of firms owned by domestic individual investors has decreased. However, the percentage of firms owned by foreign institutional investors has increased.

The Effect Of Earnings Quality On The Predictbaility Of Accruals And Cash Flow Models In Forcasting Future Cash Flows

Earnings management affects negatively the quality of earnings which affect the predictability of earnings. The main questions this paper answer are: (1) is the superiority of aggregate earnings over aggregate cash flows affected by the level of earnings quality? (2) Is the superiority of aggregate earnings over the main components of earnings (i.e. operating cash flows, accounts receivable, inventory, accounts payable, and depreciation) affected by the level of earnings quality? The methodology used in this study is a development of the study of Barth et al (2001). We provide replication of their main analysis, and then extend this to deal with the effect of earnings quality. Three main measures for earnings quality used (i.e. the modified Jones model (MJ, the modified Jones model with return on assets (MJROA) and the accruals quality (AQ). To provide answers on the questions of this study, the whole sample of the study is divided into two groups according to the level of earnings quality: high earnings quality and low earnings quality. The study covers the case of Jordan and employs data on a sample of industrial and services firms. The time horizon of this study includes the period of 2000-2014. The main conclusions of this study is derived from comparing the adjusted R2 of the models employed using Vuong's test. The results of the analysis reveal that the quality of earnings affect the predictability of both cash flow and earnings in that earnings outperform cash flows in predicting one-year a head future cash flow when earning quality is high. On the other hand, the main component earnings reveal incremental information content beyond that exist in earnings or cash flow regardless of the quality of earnings. These findings suggest that operating cash flow is appreciated by the market when earnings quality is low. In addition, the finding of this study provide more evidence on the importance of using all the accounting data provided in the financial statement to predict future cash flow to avoid the effect of earnings management on the predictability of the accounting data. This paper contribute to the existence literature in different ways: (i) provide more evidence on the superiority of cash flows over earnings based on developing countries as most the evidence were based on developed countries. (ii) the results shed light on the role of earnings management in destroying the reliability of earnings as a tool to predict future cash flows.

The cost of innovation: R&D and high cash holdings in U.S. firms

We show that R&D investment explains a significant portion of the increase in the average cash-to-assets ratio of U.S. firms, which more than doubled between 1980 and 2012. In 1980, an average firm held $0.04 in cash for $1.00 of R&D spending, but this had increased to $0.60 by 2012. The increasing sensitivity of cash holdings to R&D investment and the increase in R&D spending of the typical firm explain over 20% of the increase in aggregate cash holdings. Intensified domestic and global competition appears to be an important explanation for the increased propensity of R&D-intensive firms to hoard cash.

Cash flow news, discount rate news, and momentum

Abstract We examine the effect of aggregate cash flow news and discount rate news on momentum returns. We find that momentum profits are higher following aggregate positive cash flow news, even in down markets or low sentiment periods. This finding expands on the evidence in Cooper et al. (2004) that momentum is significant only when past market returns are non-negative and in Antoniou et al. (2013) that momentum is weaker when sentiment is pessimistic. We find that the higher momentum profits during aggregate positive cash flow news periods are primarily driven by the losers continuing to underperform in subsequent periods. Our findings are consistent with the Hong and Stein (1999) model in the sense that gradual diffusion of contradictory news is accentuated when change in wealth is positive and relatively more permanent.

The Evolution of Corporate Cash

We study the evolution of corporate cash holdings from 1920 to 2014. We show that the recent increase in average cash is not unique but is one of three large magnitude changes in average cash over the past century. However, there are several key differences in modern cash holdings relative to the earlier periods: Earlier changes in cash were broad-based and within-firm; in contrast, the modern run-up in average cash is dominated by cash-rich Nasdaq firms entering the sample, with negative or flat within-firm changes. Moreover, the modern increase in aggregate cash did not start until about 2000.Perhaps surprisingly, we find that estimated relations thought to support precautionary and transaction motives for holding cash are weaker or disappear earlier in the century, when financial frictions were arguably more severe. In general, firm characteristics have little ability to explain time-series changes in average or aggregate cash through the century, but macroeconomic forces, corporate profitability and investment, and repatriation tax incentives help fill this gap.