Cash Flow Data Research Articles

The Limited Partnership Model in Private Equity: Deal Returns over a Fund's Life

Private equity (PE) fund managers recurrently close limited partnerships, thereby running several funds simultaneously. Conceptually, the limited partnership model as a form of financial intermediation should not have any impact on decisions about single PE investments and returns. This study takes advantage of a unique database containing cash flow data on 10,566 investments by 702 PE limited partnerships. We note a robust drop in investment returns once a new limited partnership is established. This pattern has increasingly emerged since the late-1990s. We conclude that the current governance form of limited partnership model is of questionable benefit in a matured PE industry.

Benchmarking Private Equity: The Direct Alpha Method

We reconcile the major approaches in the literature to benchmark cash flow-based returns of private equity investments against public markets, a.k.a. 'Public Market Equivalent' methods. We show that the existing methods to calculate annualized excess returns are heuristic in nature, and propose an advanced approach, the 'Direct Alpha' method, to derive the precise rate of excess return between the cash flows of illiquid assets and the time series of returns of a reference benchmark. Using real-world fund cash flow data, we finally compare the major PME approaches against Direct Alpha to gauge their level of noise and bias.

Cash flow management and manufacturing firm financial performance: A longitudinal perspective

A firm's cash flow policies, which manage working capital in the form of cash receivables from customers, inventory holdings, and cash payments to suppliers, are inexorably linked to the firm's operations. Building on earlier research, this study: (i) extends prior studies by examining the relationships between changes in cash flow measures and changes in firm financial performance using a longitudinal sample of firm data; and (ii) investigates the direction of the relationship between quarterly changes in cash flow positions and firm financial performance. This study is conducted using the Generalized Estimating Equations (GEE) methodology to analyze a longitudinal sample of eight quarters of cash flow and financial performance data from 1233 manufacturing firms. The analyses find that changes in the widely used Cash Conversion Cycle (CCC) metric do not relate to changes in firm performance; however, changes in the less used Operating Cash Cycle (OCC) metric are found to be significantly associated with changes in Tobin's q. This examination of how changes in specific cash flow measures relate to changes in Tobin's q shows that both reductions in Accounts Receivables (measured as Days of Sales Outstanding [DSO]) and reductions in Inventory (measured as Days of Inventory Outstanding [DIO]) relate to firm financial performance improvements that persist for several quarters. Endogeneity tests of whether a firm's cash flow management strategy leads to changes in firm performance or if the cash flow strategy is a byproduct of firm performance suggest that reductions in DSO lead to improved firm financial performance.

How Persistent is Private Equity Performance? Evidence from Deal-Level Data

The persistence of returns is a critical issue for investors in their choice of private equity managers. In this paper we analyse buyout performance persistence in new ways, using a unique database containing cash-flow data on 13,523 portfolio company investments by 865 buyout funds. We focus on unique realized deals and find that persistence of fund managers has substantially declined as the private equity sector has matured and become more competitive. Private equity has, therefore, largely conformed to the pattern found in most other asset classes in which past performance is a poor predictor of the future.

Has Persistence Persisted in Private Equity? Evidence from Buyout and Venture Capital Funds

We present new evidence on the persistence of U.S. private equity (buyout and venture capital) funds using cash-flow data sourced from Burgiss’s large sample of institutional investors. Previous research, studying largely pre-2000 data, finds strong persistence for both buyout and venture capital (VC) firms. Using ex post or most recent fund performance (as of June2019), we confirm the previous findings on persistence overall as well as for pre-2001 and post-2000 funds. However, when we look at the information an investor would actually have – previous fund performance at the time of fundraising rather than final performance – we find little or no evidence of persistence for buyouts, both overall and post-2000. For post-2000 buyouts, the conventional wisdom to invest in previously top quartile funds does not hold. Using previous fund PME at fundraising, we find modest persistence, but it is driven by bottom, not top quartile performance. On the other hand, persistence for VC funds persists even when using information available at the time of fundraising. Therefore, the conventional wisdom of investors holds for VC.

Shareholders Value Creation and Measurement: Approaches

This paper aims to explain what shareholder value creation means, how the present emphasis on shareholder value measurement as a strategic initiative has developed in management practice and the present day tools and techniques of shareholder value creation and measurement. The shareholder value creation approach helps to strengthen the competitive position of the firm by focusing on wealth creation. It provides an objective and consistent framework of evaluation and decision-making across all functions, departments and units of the firm. It can be easily implemented since cashflow data can be obtained by suitably adapting the firm’s existing system of financial projection and planning. The only additional input needed is the cost of capital. The adoption of the shareholder value creation approach does require a change of the mind-set, and educating the managers about the shareholder value approach and its implementation.

The value relevance of earnings and cash flows: the Tunisian stock market evidence

This study examines the value-relevance of three performance measures: earnings, cash flows from operations (CFO) and funds flows from operations (FFO). It addresses three questions. First, do accounting earnings and cash flows data have information content? Second, does accounting earnings (cash flows) have incremental information content over cash flows (earnings)? Third, does the incremental information content of cash flows (earnings) increases (decreases) with a decrease in the permanence of earnings? The empirical findings are consistent with: 1) all three performance measures having explanatory power for returns individually and earnings performing better than cash flows in explaining security price variation; 2) earnings having incremental information content beyond CFO and FFO; 3) CFO having incremental information content beyond earnings; 4) FFO having no incremental information content over earnings. Results do not however support any increase in the incremental information content of cash flow...

Further evidence on the usefulness of cash flow components for forecasting future cash flows

Based on within-sample and out-of-sample tests on 348 listed Australian companies over 1992–2004, we find that direct method cash flow components have greater predictive ability than for aggregate operating cash flows of future cash flows. Unlike prior research, we use actual direct method cash flow data instead of estimated data in our forecasting models. The results are robust to a battery of sensitivity tests, including control for firm size, industry membership, profitability, negative cash flows, and the length of the operating cash cycle. Moreover, our results remain qualitatively similar for forecast horizons up to six years. Our findings directly contribute to the policy debate on whether standard setters should mandate direct method cash flow statements.

Direct versus Indirect Estimation of Foreign Exchange Cash Flow Exposure

To estimate foreign exchange (FX) cash flow exposure, one may choose between direct and indirect regression approaches, where the direct approach uses accounting-based cash flow data and the indirect approach uses equity returns as a cash flow proxy. The indirect approach typically includes one or more additional independent variables to control for the impact of FX changes on the required rate of return. Frequently, the control variable is an equity index. We argue that a bond return is a better control variable than an equity index. For a sample of U.S. firms, we find empirical support for this idea.

Return persistence and investment timing decisions in Taiwanese domestic equity mutual funds

Purpose – The purpose of this paper is to investigate whether mutual fund investors can make effective cash flow timing decisions and examine the sensitivity of these decisions to past fund performance using cash flow data at the individual fund level.Design/methodology/approach – This study examines performance persistence and investor timing ability of 200 domestic equity mutual funds in Taiwan between 1996 and 2009. In particular, a performance gap measuring the difference between dollar‐weighted average monthly returns and geometric average monthly returns is used to evaluate investors' timing ability.Findings – The empirical results show that funds that have performed well (poorly) in the previous year tend to continue performing well (poorly) in the following year, and investors' timing performance is negatively related to fund performance. The results also show that investors' timing performance is significantly and negatively related to fund size, length of fund history, and momentum‐style of fund...

How Can Banks Effectively Stabilize Their Retail Customers’ Saving Behavior? The Impact of Contractual Rewards on Saving Persistence and Cash Flow Volatility

Banks face a 'behavioralization' of their balance sheets since deposit funding increasingly consists of non-maturing deposits with uncertain cash flows exposing banks to asset liability (ALM) risk. Thus, this study examines the behavior of banks’ retail customers regarding non-maturing deposits. Our unique sample comprises the contract and cash flow data for 2.2 million individual contracts from 1991 to 2010. We find that contractual rewards, i.e., qualified interest payments, and government subsidies, effectively stabilize saving behavior and thus bank funding. The probability of an early deposit withdrawal decreases by approximately 40%, and cash flow volatility drops by about 25%. Our findings provide important insights for banks using pricing incentives to steer desired saving patterns for their non-maturing deposit portfolios. Finally, these results are informative regarding the bank liquidity regulations (Basel III) concerning the stability of deposits and the minimum requirements for risk management (European Commission DIRECTIVE 2006/48/EC).

Comparative Prediction Relative to Reporting of Operating Cash Flows for Tehran Stock Exchange- Listed Companies

This study examines the information content of alternative approaches to presenting cash flow from operations (CFO) data. The predictive ability of derived historical data reflecting the direct method compared with archived indirect method-based data, and, cash receipts and payments data in comparison with net amounts are evaluated with respect to future cash flows. In order to test the research questions, multivariate regression analyses are used, focusing on a sample of 65 firms listed on the Tehran Stock Exchange (TSE) between 2001 and 2007. For the purpose of comparing the predictive ability of presented data, modified R2 and Mean Absolute Percentage Error (MAPE) are utilized. The results fail to reveal any advantage for direct versus indirect-method data. This may be due to problem of articulation of the balance sheet and income statement producing nontrivial errors in the estimation of direct method-cash flows, i.e. cash received from customers, and cash paid to employees and suppliers. However, the findings do suggest the superiority of disaggregated over net cash flows in predicting CFO. The results imply that in developed or developing countries where cash flow data are reported under the indirect method, by expressing a strong preference for direct, disaggregated CFO reporting, coupled with appropriate incentives, regulators could increase the quality of financial reporting.

Informativeness And Predictability Of Cash Flows

<span>This study investigates the relationship between the informativeness and the predictability of cash flow data. Predictability is defined as the ability of an accounting variable to predict future cash flows. Using a two-signal capital asset pricing model, this study predicts that the incremental informativeness of cash flows is an increasing function of its predictability and a decreasing function of the predictability of earnings. The empirical evidence is consistent with this prediction. This study contributes to the cash flow/earnings literature in that it identifies a context in which cash flow data possess significant incremental information content beyond that reflected in earnings. The research findings of this study also have methodological implications for other incremental information content studies. Specifically, it suggests that the informativeness of alternative information is an important factor in examining the incremental information of an accounting variable.</span>

A study of the incremental power of using Statement of Cash Flows ratios in predicting companies' failure in Malaysia

The main purpose of this study is to test whether adding statement of cash flow data to accrual ratios can increase the prediction power of the company failure model applied to Malaysian listed companies. As a starting point, we apply Multiple Discriminant Analysis (MDA) to develop a brand new company failure prediction model. Our empirical evidence shows that a combined use of ratios derived from income statement (I/S), balance sheet (B/S) and statement of cash flow provides a better predicting power than only using I/S and B/S. Our results show high successful prediction rates of our model. Tested on holdout samples, we achieved 91.07 percent for a one-year prediction and 89.29 percent for a two-year prediction.

A study of the incremental power of using Statement of Cash Flows ratios in predicting companies’ failure in Malaysia

The main purpose of this study is to test whether adding statement of cash flow data to accrual ratios can increase the prediction power of the company failure model applied to Malaysian listed companies. As a starting point, we apply Multiple Discriminant Analysis (MDA) to develop a brand new company failure prediction model. Our empirical evidence shows that a combined use of ratios derived from income statement (I/S), balance sheet (B/S) and statement of cash flow provides a better predicting power than only using I/S and B/S. Our results show high successful prediction rates of our model. Tested on holdout samples, we achieved 91.07 percent for a one-year prediction and 89.29 percent for a two-year prediction.

The Value Relevance of Earnings and Cash Flows: Empirical Evidence for Tunisian Stock Market

This study examines the value-relevance of three performance measures: earnings, cash flows from operations (CFO) and funds flows from operations (FFO). It addresses three questions. First, do accounting earnings and cash flows data have information content? Second, does accounting earnings (cash flows) have incremental information content over cash flows (earnings)? Third, does the incremental information content of cash flows increases and the incremental information content of earnings decreases with a decrease in the permanence of earnings? Based on tests of association between security returns and these fundamental variables, a pattern of consistent results emerges. All three performance measures have explanatory power for returns individually. Results are also consistent with earnings performing better than FFO and CFO in explaining security price variation and suggest that accruals as a whole convey relevant information about changes in firm value. In relation to the incremental information content of these variables, results are consistent with (i) earnings having incremental information content beyond CFO and FFO, and (ii) CFO having incremental information content in addition to that contained in earnings and (iii) FFO having no incremental information content over earnings. While results of the study don’t support any increase in the incremental information content of cash flows in presence of transitory items in earnings, they however provide evidence on investors’ rationality since they show that the permanent component of earnings is more valued by the market than the transitory component.

Estimating Cashflow-at-Risk (CFaR)

Of the many risks faced by restaurants, a shortage of cashflow is among the most damaging. This study introduces an effective tool to estimate the cashflow risk of restaurants, so that firms can be ready to address the potential risks. Using a comparables approach to Cashflow-at-Risk (CFaR), the study analyzes cashflow data from publicly listed U.S. restaurant firms from 1988 to 2007. The study found that estimated cashflow shortfalls were larger for small and medium-size firms than for large firms. Also, full-service restaurants’ cashflow shortfalls were larger than those of limited-service restaurants, suggesting relative cashflow risk positions for different restaurant segments. This study provides nonfinancial firms such as restaurant firms with a practical tool to estimate cashflow risk, which could mitigate the probability of financial distress and improve the financial health of firms.

Using Artificial Neural Networks To Examine Semiotic Theories Of Accounting Accruals

<p class="MsoNormal" style="text-align: justify; line-height: normal; text-indent: 0in; margin: 0in 0.5in 0pt; tab-stops: center 3.25in; mso-hyphenate: none;"><span style="font-family: Times New Roman;"><span style="font-size: 10pt; mso-bidi-font-weight: bold;">Although the primary purpose of accounting is to communicate information, few studies have investigated the communicative nature of accounting.<span style="mso-spacerun: yes;">  </span>This study uses semiotics, a theory of signs and signals, to examine the purpose and usefulness of accounting accruals with a popular tool in forecasting--artificial neural networks.<span style="mso-spacerun: yes;">  </span>Two primary theories are proposed by this study.<span style="mso-spacerun: yes;">  </span>The <span style="mso-bidi-font-style: italic;">Theory of the Functions of Accounting Accruals</span> categories accounting accruals by their basic functions and states that two general types of accounting accruals exist: syntactic accruals and semantic accruals.<span style="mso-spacerun: yes;">  </span></span><span style="font-size: 10pt;">Syntactic accounting accruals reflect incomplete transactions under a system of cash receipts and cash disbursements.<span style="mso-spacerun: yes;">  </span>Semantic accounting accruals present messages in a different format than their counterparts in a system of cash receipts and cash disbursements.<span style="mso-spacerun: yes;">  </span>The <span style="mso-bidi-font-style: italic;">T</span>heory of the Pragmatic Information of Accounting Accruals states that accounting accruals contain pragmatic information (value) because of their functions.<span style="mso-spacerun: yes;">  </span>The pragmatic information (value) of accounting accruals is examined by comparing the ability of accrual accounting data to forecast future cash flows compared to that of cash-flow accounting data.<span style="mso-spacerun: yes;">  </span>Forecasts are made using backpropagation neural networks.<span style="mso-spacerun: yes;">  </span>The results indicate that both syntactic<span style="mso-spacerun: yes;">  </span>and semantic accounting accruals contain pragmatic information (have value when forecasting future cash flows).<span style="mso-spacerun: yes;">  </span>The study provides evidence of the pragmatic information (value) of annual accounting accruals.<span style="mso-spacerun: yes;">  </span>However, no evidence was found in support of the pragmatic information (value) of quarterly accounting accruals.<span style="mso-spacerun: yes;">  </span>This result implies that annual accrual accounting data is a better predictor of future cash flows than cash-flow data while quarterly accrual accounting data is not. </span></span></p>

Momentum or contrarian investment strategies: Evidence from Dutch institutional investors

This paper analyses investment strategies of three types of Dutch institutional investors – pension funds, life insurers and non-life insurers – over the period 1999–2005. We use balance sheet and cash flow data, including purchases and sales of equity, fixed income and real estate. We trace asset reallocations back to both active trading and revaluations and link investment decisions to firm-specific characteristics and macroeconomic variables. Overall, our results indicate that all three investor types tend to be contrarian traders, i.e. they buy past losers and sell past winners. Especially pension funds showed this behaviour in the most turbulent part of the sample – the crash of 2002 and early 2003 – implying that these institutions have a stabilising impact on financial markets when this is needed most. Life insurers tend to be contrarian traders when they have a high proportion of unit-linked policies, while non-life insurers are contrarian when they have a more risky business model.

Internal Sources of Finance and the Great Recession

The rising stockpile of cash as a share of total assets at U.S. firms has intrigued economists since at least the paper of Bates, Kahle, and Stulz (2006), yet there has been relatively little work on where this cash has come from and how it is related to investment performance. We exploit Statement of Cash Flows data from Compustat to decompose firms’ cash stocks and show that the rise in cash holdings has coincided with an increased willingness to save internally generated cash. We show that although investment is normally sensitive to externally generated cash, the increased sensitivity of investment to cash during the Great Recession is driven by cash from internal sources. Smaller firms were also more affected by thr recent downturn than larger firms. Our results agree with the findings of Almeida, Campello, and Weisbach (2004) on cash hoarding and financial constraints, as well as the estimates in Duchin, Ozbas, and Sensoy (2010) on the important role of saved cash during the financial crisis.