Cash Flow Deficit Research Articles

Financial Liberalization and Firm's Choice of Financial Structure: Some Indian Evidence

This paper analyses the effect of financial liberalization, particularly equity market reforms on firm's choice of financial structure. The poper approaches the question with the use of two concepts: traditional sources and uses of funds and a concept of marginal propensity towards debt, which measures the proportion of cash flow deficit being financed by debt. Our result provides some insight into the validity of received wisdom in explaining the behaviour of Indian corporate in response to the increasing marketization of financial system.

Why Do (or Did?) Internet-Stock IPOs Leave So Much 'Money on the Table'?

The economy advent and the Euro's arrival have given energy to EU stock markets. Even though late with respect to the US and the UK, the number of firms going public on these has considerably increased, even as a consequence of the birth of new pan-European second markets. Most IPOs resulted in huge short-run returns, compared to the offer price. The initial underpricing has been particularly manifest for firms whose products and service pertain to high-tech sectors, and distinctively to the Internet world. Yet, a substantial correction in stock prices has occurred in 2000 driven by investors' concerns about Internet companies' cash flow deficits. Many firms have been induced to delay their offerings, and the offer prices were revised downward either by the issuers or by the market with mortifying initial returns. In this paper we analyze a survey of Internet stock IPOs, listed on the Euro's secondary Stock Exchanges. The sample is made up by 86 IPOs, listed on the EASDAQ and EURO-NM from 1/1/1999 to 1/5/2000. We find an initial average return equal to 76.43%, i.e. the first-day offer price is much higher than the offer price. More than 4.6 billion euro were on the table by the IPOs issuers (54.3 million euro on the average). We aim at investigating why Internet-stock IPOs leave (or just left ?) so much money on the table. We find that the initial underpricing is strongly related to the information gathered during book building activity in the pre-selling period, which drives the revision of the prospectus price range and signals the IPO quality to uninformed investors. In fact, when the offer price is equal to the maximum price in the ex-ante file range the mean underpricing is equal to 93.71% while it is negative when the offer price is equal to the minimum price. By focusing on Italian Internet companies IPOs we also verify that IPOs underpricing does not annoy the issuers, since they discover to be much wealthier than expected, coherently with the prospect theory by Loughran and Ritter (2000). Finally we find that the initial return is driven by a number of determinants: it is positively related to the market momentum but negatively related to the density of IPOs in the same national market during the 30 days before the offering, consistently with the hot issue markets theory. Interestingly, accounting data from the prospectus about sales and profits seem to force the initial underpricing, too. The dilution of insiders' ownership is not recognized as a significant determinant. We argue that the remarkably high initial return of Internet stock IPOs in Euro-land is related to Internet euphoria, but also to the limits of traditional evaluation methods adopted by intermediates in determining the offer price. J.E.L Classification codes: G30, G32.

The impact of cash flow volatility on discretionary investment and the costs of debt and equity financing

We show that higher cash flow volatility is associated with lower average levels of investment in capital expenditures, R&D, and advertising. This association suggests that firms do not use external capital markets to fully cover cash flow shortfalls but rather permanently forgo investment. Cash flow volatility also is associated with higher costs of accessing external capital. Moreover, these higher costs, as measured by some proxies, imply a greater sensitivity of investment to cash flow volatility. Thus, cash flow volatility not only increases the likelihood that a firm will need to access capital markets, it also increases the costs of doing so.

Southern Farmers' Exposure to Income Risk Under the 1996 Farm Bill

AbstractThis paper investigates the farm-level impacts of the 1996 farm bill on the South. Focus group perceptions of risk sources, observed acreage changes, and the farm-level impact of increased price risk are evaluated. Focus group respondents ranked price and yield as the two most important sources of risk, and diversification was ranked highly as a risk-management tool. Limited data suggest that acreage shifts among crops are occurring in the South, presumably aided by the 1996 farm bill. Higher probabilities of cash flow deficits are estimated for cotton and rice relative to feedgrain, wheat, and oilseed operations.

Wealth Effects of Corporate Debt Issues: The Impact of Issuer Motivations

This study documents a link between the market's reaction to a new issue announcement and the issuer's motivation for both debt and equity issues. Negative and significant price reactions occur for outstanding debt and equity when the issuer faces an unexpected cash flow shortfall. Insignificant reactions accompany unexpected increases in capital expenditures or leverage or an expected debt refinancing.

DIE FINANSIëLE UITVOERBAARHEID VAN SPILPUNTBESPROEIING: DIE INAGNEMING VAN RISIKO MET BEHULP VAN KUMULATIEWE WAARSKYNLIKHEIDSVERDELINGS / Financial feasibility of centre pivot irrigation: Taking into consideration risk by using cumulative density functions

The financial feasibility of six profitable centre pivot systems was evaluated by using cumulative density functions (CDFs) of crop prices and yields. CDFs do not only indicate all the outcomes but also the probability to realize a specific value of the performance measure. If the systems are financed over a period of 5 years, there is a probability of 70% for a cash flow deficit; this probability decreases to 35% with financing over ten years. The application of financial methods, bridging financing or adjusted production practises can be considered to ensure the financial feasibility of an investment. However reliable results can only be obtained if risks are taken into account as realisticly as possible in the analyses.

Establishing Equitable Contract Rates for Timber Harvesting Using Deterministic Simulation

Abstract Deterministic simulation was used in a case study of a logging contractor working in south central British Columbia. A comparison of simulated and actual contract rates for five tracts showed substantial differences. Cashflow shortfalls and surpluses arising from the disparity betweensimulated costs and revenue generated from logging were appreciable. The findings suggest that deterministic simulation may provide a means for establishing equitable contract rates for harvesting individual tracts of timber. North. J. Appl. For. 10(1): 5-7.

Multinationality and Common Stock Offering Dilution

AbstractThis study examines the common stock offering dilution of multinational and domestic firms. Results provide evidence that the benefits of multinationality do not offset the negative information effect of perceived cash flow shortfalls at the announcement of security offerings. MNCs and purely domestic firms experience comparable negative valuation and offering dilution at the announcement of a common stock offering. These results are independent of size and performance differences between multinational and domestic firms at the announcement year.

The Debt and the Cash Flow of Residents: I. The Grim Present

To the Editor.— The recent JAMA article about the effect of student loan indebtedness on resident cash flow 1 and the Resident Forum 2 that was published in the same issue address important issues facing today's house staff. Student loan indebtedness is a growing area of concern as the number of students who borrow and the amount of indebtedness at the end of medical school continue to increase. Careful examination of the model of Hernried et al 1 reveals other stressful points. At many or most levels of indebtedness examined in the model, even eliminating loan payments as a yearly expense through deferment would not make up the cash-flow deficit for that year. This implies that annual stipends are not only inadequate to begin paying back loans, but also inadequate to meet annual basic living expenses. One alternative offered is to defer loan payments during residency. As the Resident

Constraints on Oxen Cultivation in the Sahel: Comment

In a recent paper, Delgado and McIntire argue that lack of profitability is a sufficient explanation for nonadoption of animal traction using oxen (ATO) in the Sahel. The purpose of this comment is to present alternative explanations for the nonadoption of ATO and to debate some of the points made by Delgado and McIntire concerning the labor requirements of ATO. The magnitude of the ATO investment and the long learning period involved in perfecting its use both argue for a multiyear perspective in assessing profitability rather than the single-year perspective used by Delgado and McIntire.' Oxen traction is not a simple-or short-term investment for the peasant farmer. Experience with a recent ATO project in eastern Upper Volta (Barrett et al.) indicates that a fourto six-year learning period is required for a new adopter to realize the full technical benefits of ATO. Eight years may elapse before the investment breaks even. Because of high initial investment costs and deferred benefits, the long-run profitability of ATO, as measured by net present value or internal rate of return, is generally much lower than that indicated by single-year analysis (Lassiter). Even where long-run ATO profitability is expected, severe cash flow problems are likely in the short run. Ten-year cost and return projections for eastern Upper Volta suggest a 20% to 30% income reduction for ATO adopters during the first four years of the investment, despite an internal rate of return of 15% (Lassiter, p. 233). Because many Sahelian farmers sell little of their farm output, covering such cash flow deficits would require either (a) nonfarm cash income or (b) a shift toward cash crops, which could jeopardize family food supplies. A sample of 125 relatively successful ATO adopters in Upper Volta contained substantially larger households with proportionally more nonfarm cash income than nonadopters (Barrett et al.). Furthermore, the extremely variable climate of the Sahel confronts adopters of ATO with major financial and technical risks which long-run average profitability indicators hide. By adversely affecting yields and income, poor weather could worsen cash flow deficits critically, especially in years soon after adoption. Lack of institutional support also discourages adoption of ATO. Successful use of ATO requires a comprehensive network of services, such as agricultural extension, marketing, animal training, veterinary care, credit, and equipment repair. However, provision of these services on an integrated basis has been characteristically weak in most ATO projects (Sargent et al.). Also the majority of projects has been small and underfunded, and most Sahelian farmers have not had an opportunity to adopt ATO. Thus, the low adoption of ATO in the Sahel is partly a result of institutional failure rather than a widespread decision by farmers not to adopt the technology, as Delgado-McIntire imply. The Delgado-McIntire paper emphasizes the important influence of the opportunity cost of labor on the farmer's decision regarding ATO adoption. A shortcoming of their analysis is that it exaggerates the quantity, timing, and quality of labor required to maintain draft oxen. Their core linear programming (LP) coefficients (pp. 191-92) apparently are based on Delgado's original Tenkodogo study, which used labor data for herding range cattle as a proxy for the maintenance requirements of draft oxen. Thus the Delgado-McIntire model assumes that a full-time adult male is required to care for two draft oxen uring the growing season, as would be the case for range cattle. This clearly attaches a prohibitive labor cost to ATO and seriously constrains production possibilities in their LP model. Draft oxen do not require such intensive surveillance. Unlike wild range cattle, draft oxen are trained, manageable animals which can be cared for by young children of either sex. Because oxen are stall-fed, labor requirements are minimal except when forage crops are harvested. Data on twelve pairs of draft oxen in eastern Upper Volta (Lassiter, pp. -173-77) indicate that the monthly worker equivalent'2 labor requirements for animal mainteEric W. Crawford is an associate professor, Department of Agricultural Economics, Michigan State University. Gregory C. Lassiter is a professor, Department of Agricultural Economics and Education, California State University, Fresno. The authors gratefully acknowledge the helpful comments of the anonymous reviewers. Review was coordinated by Hans P. Binswanger, associate editor.