Cash Earnings Research Articles

Operating Cash Flow and Earnings Under IFRS/GAAP: Evidence from Australia, France & UK

The purpose of this paper is to investigate the difference in the value relevance of operating cash flow and earnings in stock price before and after the mandatory IFRS adoption. The study basically uses Feltham and Ohlson (1995), Joos (1997) and other related studies valuation model. Using a sample of firms from 3 IFRS countries from 2003 to 2012, we find that operating cash flows seem to be more value relevance than earnings within and across country border after a switch to IFRS in Australia and the UK, and earnings seem to be more value relevance than operating cash flows in France. Additionally, Operating cash flow and earnings convey incremental explanatory power to explain share prices in Australia, France and the UK. After a switch to IFRS in 2005, our study shows that the difference in account number (operating cash flows and earnings) reduces across country border but increases within country when both the IFRS and local accounting standards are used. Taken together, our findings suggests that after a swift to the mandatory IFRS adoption, even though income statement and the statement of cash flow are very vital for strategic decisions, investors in Australia and UK are more likely to pay more value relevance to the statement of cash flow than income statement whereas in France, income state is more required than statement of cash flow.

Predicting Operating Cash Flows and Earnings Using the Direct Method Compared to the Indirect Method Statement of Cash Flows

This study assesses whether the direct method incrementally predicts future operating cash flow and earnings beyond the indirect method. Using a sample of Australian listed companies reporting under International Accounting Standards, results indicate that the direct method predicts future operating cash flows with greater accuracy than the indirect method. Direct method disclosure is incrementally useful for predicting earnings when companies experience low earnings permanence. Findings show that users cannot re-create or estimate direct method line items accurately with mean absolute percentage errors above 3 percent outside the upper 25th percentile for cash receipts from customer and cash payments to suppliers. In fact, estimated direct method line items provide less predictive accuracy for earnings and operating cash flow than an aggregate operating cash flow measure, after controlling for accruals. This result also holds after I truncate estimation errors for direct method disclosures to the upper 90th and 75th percentiles.

Does poverty alleviation decrease depression symptoms in post-conflict settings? A cluster-randomized trial of microenterprise assistance in Northern Uganda.

By 2009, two decades of war and widespread displacement left the majority of the population of Northern Uganda impoverished. This study used a cluster-randomized design to test the hypothesis that a poverty alleviation program would improve economic security and reduce symptoms of depression in a sample of mostly young women. Roughly 120 villages in Northern Uganda were invited to participate. Community committees were asked to identify the most vulnerable women (and some men) to participate. The implementing agency screened all proposed participants, and a total of 1800 were enrolled. Following a baseline survey, villages were randomized to a treatment or wait-list control group. Participants in treatment villages received training, start-up capital, and follow-up support. Participants, implementers, and data collectors were not blinded to treatment status. Villages were randomized to the treatment group (60 villages with 896 participants) or the wait-list control group (60 villages with 904 participants) with an allocation ration of 1:1. All clusters participated in the intervention and were included in the analysis. The intent-to-treat analysis included 860 treatment participants and 866 control participants (4.1% attrition). Sixteen months after the program, monthly cash earnings doubled from UGX 22523 to 51124, non-household and non-farm businesses doubled, and cash savings roughly quadrupled. There was no measurable effect on a locally derived measure of symptoms of depression. Despite finding large increases in business, income, and savings among the treatment group, we do not find support for an indirect effect of poverty alleviation on symptoms of depression.

Livelihood Change and Household Strategies: Social Displacement of the Upper Class in Dhading

This article examines livelihoods transition among agrarian households in a cluster of villages adjacent to Kathmandu in a post-Neoliberal context. It specifically looks at the way these households respond to capitalist expansion in Nepal’s agrarian rural setting privileged to draw cash earnings. Looked at from the quest of longer term social change, this article identifies a great deal of similarity in household responses along class lines, and thus, concludes that household strategies broadly embrace class-specific behaviour. In identifying patterns of household response, this article also argues that class-differentiated analysis of household response can potentially illuminate social science understanding of the way capitalism penetrates into the countryside and brings social differentiation. Finally, this article demonstrates that social differentiation of agrarian households in rural Nepal is a mechanism of siphoning off of the rural surplus somewhere else (in this research context Kathmandu)–a mechanism widely attributed for an uneven development and underdevelopment of countryside Nepal.

Dividends as Reference Points: A Behavioral Signaling Approach

We outline a dividend signaling model that features investors who are averse to dividend cuts. Managers with strong unobservable cash earnings pay high dividends but retain enough to be likely not to fall short next period. The model is consistent with a Lintner partial-adjustment model, modal dividend changes of zero, stronger market reactions to dividend cuts than increases, comparatively infrequent and irregular repurchases, and a mechanism that does not depend on public destruction of value, which managers reject in surveys. New tests involve stronger reactions to changes from longer-maintained dividend levels and reference point currencies of American Depository Receipt dividends. Received July 16, 2012; accepted September 15, 2015 by Editor David Hirshleifer.

Bond Analysts' Forecasts on Cash Flows and Earnings

We examine the propensity and properties of bond analysts’ forecasts on cash flows and earnings. We find that the probability to issue cash flow, relative to earnings, forecasts is greater for bond analysts than for equity analysts, consistent with the notion that cash flow, relative to earnings, information is more important to bond investors than for stock investors. In addition, bond analysts’ cash flow (earnings) forecasts are more (less) accurate than equity analysts’ cash flow (earnings) forecasts. Finally, we show that bond investors’ reaction to bond analysts’ cash flow forecast revision is greater than that to bond analysts’ earnings forecast and that bond market reacts only to bond analysts’ forecast revisions but not to equity analysts’ forecast revisions. This manifests bond investors’ stronger demand for reliable information on future cash flows than for earnings. Overall, this study enhances our understanding of bond analysts’ informational role through their forecasting activities.

Inequalities beyond the Gini: Subsistence, social structure, gender, and markets in southwestern Madagascar

AbstractDevelopment economists typically apply the same measures of inequality to the Global South as capitalist economies, such as Gini coefficients calculated over cash earnings (income) or asset value (wealth). Yet many rural peoples straddle the market economy of cash and wages and the nonmarket economy of gifts and obligations. We examine inequality in the context of Masikoro farmers, Mikea forager‐farmers, and Vezo marine fishers of rural southwestern Madagascar, using quantitative analyses (Gini scores) and qualitative ethnography (village case studies). Gini coefficients indicate greater inequality for cash income rather than total production, for cash income Gini scores confound income inequality with market dependency, and Gini coefficients indicate greater inequality over individuals rather than households, for the latter scale masks gendered inequality. Among farmers and fishers, inequality may occur due to monopolization of the means of production, but only if private property norms replace traditional redistributive and democratizing institutions. Inequality among Mikea foragers results from friction with nonforaging neighbors. Women may experience greater equality relative to men when the foraging ecology favors their subsistence contributions. Inequality varies in degree, form, and experience; economic inequality cannot be divorced from social and political inequality.

A Survey of Managerial Perspective on Corporate Dividend Policy

This research paper examines the corporate dividend payout behaviors of non-financial firms from Istanbul Stock Exchange (Borsa Istanbul). Survey method is conducted to investigate managerial views on corporate dividend policy. The study investigates whether the evidence in Turkish stock market on dividend policy is similar to the European and the U.S. firms’ results which are reported earlier by other studies, and moreover in what extent Lintner’s (1956) findings on dividends is supported by today’s listed firms in an emerging market. The financial managers from 38 firms out of 216 non-financial companies responded the survey. The results show that there is a significant positive relationship between cash dividends and earnings. Earnings are viewed as the most important factor in dividend decision like in European and the U.S. firms. Sustainable change in earnings, stability and level of future earnings, and the desire to distribute a proportion of earnings to shareholders are the common determinants of dividend policy. The majority of the respondents reports that they target dividends. Dividend yield is the most common measure for dividend targeting. Share repurchases are not viewed as alternative to dividend payouts unlike the U.S. firms. The study finds supporting evidences for bird-in-the-hand and signaling hypotheses, and Lintner’s model.

Free Cash Flow and Earnings Management: The Moderating Role of Governance and Ownership

Free Cash Flow and Earnings Management: The Moderating Role of Governance and Ownership

A Q-Theory Model of Corporate Liquidity and Capital Structure: Development, Fitting and Applications

We develop and estimate a Q-Theory style dynamic model of the firm's liquidity reserve and capital structure. The model features financial constraints, finite maturity debt, and growth limited by convex costs. We apply the model to obtain the following: 1. We suggest a resolution of the puzzle, whereby some firms seem to have inefficiently low leverage: the empirical leverage is close to optimal according to the model, if the debt maturity is taken to be a constraint imposed by lenders. 2. We show and justify that profitability, and not earnings cash flow or liquidity, is the main determinant of investment. 3. We investigate proxies for the firm being financially constrained: we find some support for the Cash Flow Sensitivity of Cash, but more for the liquidity level.

Giving Feedback to Clients

We examine a prevalent form of client–agent interaction through a feedback-giving game. In this game, a client undertakes a nontrivial task and is compensated based on her task performance, which is only made known to her when the client–agent interaction ends. Meanwhile, her performance is disclosed to an agent, who must then give the client feedback on her performance. Upon receiving the feedback, the client reports her happiness level, which in turn determines the agent's payoff. In eight studies involving 928 subjects, we vary the way the agent's cash earnings depend on the client's reported happiness. When we make the agent's earnings proportional to the client's reported happiness, the agent inflates his feedback, and the client reports a higher level of happiness (than that reported in a control condition where the agent always provides honest feedback). We show that neither the agent nor the client behaves altruistically in their reporting. The client reports being happier because she overestimates her performance and mistakenly believes that the agent's feedback is genuine. The agent stops inflating his feedback when doing so no longer benefits him. Finally, our main findings are shown to be robust with respect to several factors, including making the agent's feedback consequential in affecting the client's payoff. In summary, we show that the agent behaves opportunistically, and the client's overconfidence of her own performance is what makes this strategy successful. Data, as supplemental material, are available at http://dx.doi.org/10.1287/mnsc.2013.1846 . This paper was accepted by Uri Gneezy, behavioral economics.

Household income, living and working conditions of dumpsite waste pickers in Bantar Gebang: Toward integrated waste management in Indonesia

This paper clarifies household income, living and working conditions of dumpsite waste pickers at Bantar Gebang final disposal site for municipal solid waste generated in Jakarta, and investigates the feasibility of integrating the informal sector into formal waste management in Indonesia. The first author did fieldwork for totally 16 months at the site and quantitative field surveys were conducted twice during the period. All respondents in the first round quantitative survey (n=1390) were categorized as follows: waste pickers, family workers, wage labors, bosses, family of the bosses, housewives, pupils/students, preschoolers, the unemployed, and others. Based on the results of the second round quantitative survey (n=69 households), their average household income was estimated to be approximately US 216 dollars per month (n=59 households), which was virtually equivalent to the minimum wage in Jakarta in 2013. Living conditions of scavengers at the site were horrible, and their working conditions were dangerous due to medical waste and other sharp waste. Polluted groundwater was one of the serious environmental problems at the site. Despite the social, health and environmental problems, they were attracted to the freedom of entering the informal recycling system in Bantar Gebang and withdrawing from the system, in which a lot of opportunities were provided for the people having few marketable skills to obtain cash earnings. The freedom of their choice should be guaranteed as a prerequisite before integrating the informal sector into formal waste management. Furthermore, special attentions are required when incomes of scavengers are the same level as minimum wages and the national economy is rapidly growing, because scavengers cannot easily change their jobs due to few marketable skills. Indonesian national waste laws and regulations should be properly applied to facilitate a socialization process at final disposal sites. Measures need to be taken to prevent children from working as informal recycling actors, especially for waste pickers aged 15 or younger.

The relative information content of cash flows and earnings affected by their extremity

Purpose – Many studies examine the relative information content of earnings and cash flows from operations. Most studies find that earnings have higher information content than cash flows. An interesting question that follows is whether these findings hold after controlling the extremity of earnings and cash flows. The purpose of this paper is to examine the relative information content of earnings and cash flows in the following four different cases: first, moderate earnings vs moderate cash flows, second, extreme earnings vs moderate cash flows, third, moderate earnings vs extreme cash flows, and fourth, extreme earnings vs extreme cash flows. Design/methodology/approach – To assess the relative information content of earnings and cash flows for each of the four cases mentioned above, the authors compare the explanatory power for regression of returns on unexpected earnings relative to regression of returns on unexpected cash flows. Therefore, the author compares the adjusted R2 of the model with earnings variables and the model with cash flows variables using Vuong's test, that examines the statistical significance of the difference between adjusted R2s of the rival (non-nested) models, and interpret a statistically higher adjusted R2 as an indicator for higher relative information content. Findings – The results show that: first, when both earnings and cash flows are moderate, earnings are more highly associated with stock market price changes than cash flows, second, when both earnings and cash flows are extreme, earnings also have greater relative information content than cash flows, third, when the extremity differs between earnings and cash flows, the moderate variable is superior to the other extreme variable in explaining security returns. These results suggest that earnings are definitely more value relevant than cash flows. However, only in cases when cash flows from operations are moderate and earnings are extreme, cash flows possess higher information content than earnings. Practical implications – The explanatory power for stock returns will be higher for earnings or cash flows depending on which is more highly persistent. This result reverses the conventional finding of the superiority of earnings over cash flows in explaining security returns. Originality/value – In contrast to previous studies, the authors control for the extremity of earnings and cash flows when evaluating the relative information content of earnings and cash flows from operations.

Currency and Interest Rate Derivatives

Currency derivatives are an important tool to manage foreign exchange risk, hedging. Organizations transacting, investing, or operating in other nations appreciate the possibility of managing currency risk. Investors, financial institutions, and businesses use currency derivatives to complement their foreign exchange positions, again mitigating exchange risks in investment, and speculation. The main benefit obtained by firms using currency derivatives is the reduction of variation in future cash flows or earnings. Interest rate derivatives are instruments in which the underlying asset is the right to pay or receive a notional amount of money at a given interest rate. The objective for their use is to mitigate interest rate risks, the major users of these instruments are corporations, agencies, and governments from nations to municipalities. Because of the typically unique characteristics of these derivatives, the bulk of this trade is done over-the-counter and generally brokered by dealers and financial institutions. According to the Bank for International Settlements (2013), the outstanding amount of single-currency interest rate derivatives in June 2013 surpassed USD 15 trillion, and only in the OTC market, involving a notional value of USD 561.3 trillion. On this survey the nature of such instruments, their valuation, and risk management strategies are analyzed.

Accruals: An overview

The paper provides a broad discussion of the topic “accruals”. Though much of what is said is familiar from the literature on accruals, the paper tries to develop concepts and show how theses forge tight links across a variety of themes. The starting point of the analysis concerns the construct of an accrual. The case is made that it should rest solely on consecutive balance sheets and the splitting of assets/liabilities into (i) cash and approximate cash, assets/liabilities and (ii) all other kinds of assets/liabilities. Given this divide of assets/liabilities one can measure the components in the foundation equation: cash earnings+net accrual=comprehensive earnings. The paper then proceeds to discuss how the net accrual relates to growth in a firm’s operating activities and the extent to which it can be informative or misleading. This topic in turn integrates with the issue of a firm’s quality of earnings and the role of accounting conservatism. Among the remaining topics, the paper discusses how one conceptualizes diagnostics to assess whether or not a period’s accrual is likely to be biased upwards or downwards. It gives rise to a consideration of how one constructs accruals that may be more informative than GAAP accruals and the role of value-relevance studies to assess the information content of accrual constructs. The paper ends with a list of suggestions how future research may be modified in light of the discussions in this paper.

Modeling market valuation of offshore drilling contractors

Abstract Offshore drilling is big business, and on a worldwide basis, contractor revenues have ranged between $25 and 50 billion a year over the past decade. The industry is organized through public, private, and state-owned companies, and in 2012 public companies Seadrill, Transocean, Ensco, Noble, and Diamond dominated the market, followed by mid-market players Rowan, Hercules, and Aban. The industry is competitive and dynamic, and contractor business strategies evolve in response to changing market demands and competitor activity. Contractors derive their cash flow and earnings by leasing rigs for exploration and development and attempt to maximize their revenue through scale economies, specialization, geographic diversity, and safe and efficient operations. The market value of contractors depends upon their rig fleet, contract backlog, and operational and financial characteristics. Market valuations change as supply and demand conditions change and companies upgrade their fleet portfolio and relocate rigs to satisfy demand. The purpose of this paper is to describe the factors that impact contractor value and to develop quantitative models of market valuation for a cross-section of public firms. A high-level overview of the offshore contract market and business strategies of firms is described. Fleet value, contract backlog, revenue, and earnings are significant predictors of market capitalization and enterprise value, and fleet value is the best predictor of firm value.

Asset Growth and Stock Market Returns: A Time-Series Analysis

I examine whether the firm-level total asset growth effect in Cooper, Gulen, and Schill (2008) extends to the aggregate stock market. I find that aggregate asset growth negatively predicts future market returns both in and out-of-sample and this result is robust across G7 countries. I further show that aggregate asset growth contains information about future market returns not captured by traditional macroeconomic variables and other measures of investment or growth. The forecasting ability of asset growth is strongly correlated with its propensity to predict equity issuance timing and growth in cash savings, earnings surprise, and systematic errors in investors' expectations.

A study on the relationship between operational cash flow and the return of stockholders

Performance measurement in managerial accounting is normally associated with cash flow and it is executed based on different figures such as testing information content abuse and accounting figures. However, increasing the information content in accrual components of earning and internal performance measurement provides additional informative insights. This paper studies the relationship between operating cash flows and earnings along with total shareholder returns. The study chooses the information of 54 firms from Tehran Stock Exchange. The results show that there were some meaningful relationship between the operating cash flow, profitability and the returns of all stakeholders. However, this happens by increasing profitability and cash flow of information asymmetry proportion to their correlation with the economic efficiency of shareholders’ returns.

THE RELATIONSHIPS OF CASH FLOWS: EVIDENCE FROM LATVIAN COMPANIES

The paper deals with the subject of relationships among the different cash flows, as well as earnings, of a company. The aim of the paper is to establish the direction and strength of mutual relationships between different cash flow measures, as well as with earnings, and to provide recommendations for the prediction of future cash flows and earnings. The methods of the research include content analysis, the calculation of relative indicators, average and median measures, as well as regression and correlation analysis. There is an empirical study of the data of 52 Latvian companies, which has resulted in testing the hypotheses put forward and substantiated in the paper. A typical Latvian enterprise relies on the operating cash flow to create the investing cash flow and does not need to rely on the external sources of financing. The author concludes that investment does pay, and, based on the assessment of results of the developed model, the investing cash flow should be used in cash flow prediction, while it should not be used in earnings prediction. The increase in financing cash flow causes a company investments to increase.

Employment Generation in Rural Africa: Mid-Term Results from an Experimental Evaluation of the Youth Opportunities Program in Northern Uganda

Can cash transfers promote employment and reduce poverty in rural Africa? Will lower youth unemployment and poverty reduce the risk of social instability? We experimentally evaluate one of Uganda's largest development programs, which provided thousands of young people nearly unconditional, unsupervised cash transfers to pay for vocational training, tools, and business start-up costs. Mid-term results after two years suggest four main findings. First, despite a lack of central monitoring and accountability, most youth invest the transfer in vocational skills and tools. Second, the economic impacts of the transfer are large: hours of nonhousehold employment double and cash earnings increase by nearly 50% relative to the control group. We estimate the transfer yields a real annual return on capital of 35% on average. Third, the evidence suggests that poor access to credit is a major reason youth cannot start these vocations in the absence of aid. Much of the heterogeneity in impacts is unexplained, however, and is unrelated to conventional economic measures of ability, suggesting we have much to learn about the determinants of entrepreneurship. Finally, these economic gains result in modest improvements in social stability. Measures of social cohesion and community support improve mildly, by roughly 5 to 10%, especially among males, most likely because the youth becomes a net giver rather than a net taker in his kin and community network. Most strikingly, we see a 50% fall in interpersonal aggression and disputes among males, but a 50% increase among females. Neither change seems related to economic performance nor does social cohesion - a puzzle to be explored in the next phase of the study. These results suggest that increasing access to credit and capital could stimulate employment growth in rural Africa. In particular, unconditional and unsupervised cash transfers may be a more effective and cost-efficient form of large-scale aid than commonly believed. A second stage of data collection in 2012 will collect longitudinal economic impacts, additional data on political violence and behavior, and explore alternative theoretical mechanisms.