Cash Flow Uncertainty Research Articles

A Study of the Impact of PSAK 71 Implementation on Financial Performance and Capital Adequacy Ratio

This study intends to compare bank financial performance in terms of net income before and after applying PSAK 71 to CKPN in terms of bank credit, capital, and financial performance. This research employs quantitative data in the form of published bank financial statements and the bank's financial ratios to analyze the impact of the new PSAK 71. The results of this study show that PSAK 71 adoption has a favorable effect and that it can provide useful data for financial report users to estimate total, period, and future cash flow uncertainty. However, there are some adverse effects, such as a rise in CKPN and a decrease in KPPM (or Capital Adequacy Ratio). The CKPN will rise by up to 50%, while the KPPM will fall by 5%. Because the decrease of CKPN could have an impact on the Bank performance and there will be more risk to be managed by the Bank, it is crucial for the Bank to make solid preparations from the strategic viewpoint, technical, and operational side.

The Effects of ESG Performance on the Relationship between Tax Risk and Cost of Capital: An Empirical Analysis of Korean Multinational Corporations

Purpose - Using a sample of Korean multinational corporations, we examine whether the relationship between tax risk and the implied cost of capital discriminates between the environmental, social, and corporate governance (ESG) of highly rated firms.
 Design/methodology - Firms with high tax risks have an increased uncertainty of future cash flows. Therefore, as the volatility of future cash flow increases, information asymmetry and the required return increases. Highly rated ESG firms can reduce information asymmetry, thereby weakening the positive relationship between tax risk and cost of capital. We employ the standard deviation of the cash effective tax rate as proxy of tax risk. We utilize the ESG rating data of the Korea Corporate Governance Service (KCGS). We use a PEG model, MPEG model, and GM model to measure the implied cost of capital.
 Findings - We find a positive association between the implied cost of capital and tax risk. The positive relationship between tax risk and the implied cost of capital weakens in highly rated ESG firms. Highly rated ESG firms prefer a stable tax position to invest after-tax cash flows into sustainable management. Therefore, the negative effects of tax risk on cost of capital can be reduced.
 Originality/value - This study provides empirical evidence that ESG activities can mitigate the negative impact of tax risk on the cost of capital for Korean multinational corporations. In a business environment where ESG activities are more important, the empirical results that ESG activities can reduce the corporate risk of Korean FDI companies are expected to provide implications for the ESG activities of multinational corporations.

Learning private equity recommitment strategies for institutional investors.

Keeping strategic allocations at target level to maintain high exposure to private equity is a complex but essential task for investors who need to balance against the risk of default. Illiquidity and cashflow uncertainty are critical challenges especially when commitments are irrevocable. In this work, we propose to use a trustworthy and explainable A.I. approach to design recommitment strategies. Using intensive portfolios simulations and evolutionary computing, we show that efficient and dynamic recommitment strategies can be brought forth automatically.

PAYOUT POLICY DURING MARKET-WIDE FINANCIAL CONSTRAINTS: EVIDENCE FROM THE COVID-19 DOWNTURN

Share repurchases are perceived as a flexible payout mechanism as it distributes free cash flow while mitigating the risk of underinvestment. It may be simpler to stop or trim share repurchases than dividend payments. We test the flexibility hypothesis of share repurchases using the Covid-19 economic crisis as a natural experiment where firms encounter a sudden cash-flow uncertainty. We employ a balanced panel of S&P 1500 firms from the period 2014 to 2021. Our results are consistent with the view that share repurchases offer more flexibility than dividends. Firms are likely to reduce share repurchases when they are cash constrained but still maintain dividend payouts. However, firms are also likely to trim dividends if the financial constraints persist.

Accounting for Intangible Assets: Thinking It Through

AbstractWith the modern corporation investing more in intangible assets, the issue of appropriate accounting for these assets is very much at the fore and formally on the agendas of accounting standards boards. Some commentators advocate that internally generated intangible assets should be booked to the balance sheet, just like tangible assets. This paper explains that this apparently straightforward solution is not so simple. There are subtleties that, when recognised, indicate that such accounting would often make both balance sheets and income statements less informative. In response, the paper outlines an accounting for intangible assets that preserves, indeed enhances, the information conveyed by both the balance sheet and the income statement and satisfies the financial reporting objective of providing information to investors about ‘the amount, timing, and uncertainty of future cash flows’.

Alternative investments: Motives and risks for investors on crowdfunding platforms

With the development of financial markets and digital technologies, private companies are starting to actively use alternative financing tools, which, in turn, are becoming an alternative for investors to put money in traditional financial assets. Among these instruments, equity crowdfunding (crowdinvesting) plays a special role, an innovative method of financing through which issuers raise funds on online portals — crowdfunding platforms, and investors make investments in exchange for company shares. The subject of many academic and practical studies is the motives and risks of investing in this instrument. Due to the information asymmetry that exists between issuers and investors, the high uncertainty of future cash flows, the dominance of nonprofessional investors in the market, and a short history of the equity crowdfunding market, currently the issues of investors’ motives and risks remain poorly studied and the results of research are mixed. The purpose of this study was to identify and analyze the motives for investing in shares of small and medium-sized businesses on crowdfunding platforms, the risks associated with them, and the relationship between investment motives and characteristics of investors and crowdfunding campaigns. The research methodology was based on a review of contemporary studies on the issues under consideration. Based on the academic concepts, the experience of experts in this field and the authors’ own expertise acquired in the field of alternative investments, the authors put forward their own view building on the existing ideas. The results of the study are valuable for all participants of the equity crowdfunding process: issuing companies, investors, crowdfunding platforms. The authors contribute to the existing research on equity crowdfunding by proposing new approaches to identification of the motives of different categories of investors in relation to the factors which were not previously studied.

The relationship between cash flow uncertainty and extreme risk: International evidence

This study investigates the relationship between cash flow uncertainty and stock price crash risk. Using a large sample of firms from 22 countries, we find that a higher cash flow uncertainty leads to a higher crash risk for firms. The empirical results also indicate that cash flow uncertainty increases crash risk in most regions, industries, and other subsamples. Furthermore, this positive relationship between cash flow uncertainty and crash risk is more pronounced for firms in highly competitive industries, and those in countries with higher economic policy uncertainty. We use simultaneous equation and two-stage least squares regression methods to address endogenous concerns. Overall, our findings have useful policy implications for investors, firms, and regulators.

Tournament-based incentives and the lease-versus-buy decision

This paper investigates the effect of firms’ tournament-based incentives (TI) on leasing. Measuring TI as the pay gap between the chief executive officer (CEO) and non-CEO executives, we find that firms with higher TI have a higher propensity to lease than purchase assets. Cross-sectional analyses suggest that this positive association is stronger for firms with high information asymmetry, low creditworthiness, and high cash-flow uncertainty. Consistent with “financial contracting” motivations of the lease suggested by Smith and Wakeman (1985), our findings indicate that, when risky corporate activities induced by TI lead to an increased agency cost of debt, leasing could more likely be used to economize on the costly external finances.

Impact of Company-Specific Determinants on Corporate Cash Holdings: Evidence From South-East European Countries

This paper investigates the impact of intercompany determinants on corporate cash holdings in South East Europe. We researched a large sample of companies listed on the stock exchanges. We found that SEE companies’ cash holdings on average is 6.94% of the total assets, which is lower than in developed countries. Intercompany determinants have a significant impact on the company’s cash holdings. Our results suggest that cash holdings are positively affected by the size of the firms, cash flow, cash flow uncertainty, debt maturity, and growth opportunities. Cash holdings are negatively affected by the net working capital, financial leverage, and capital expenditures. SEE companies operate in underdeveloped financial markets with limited access to finances, and their cash holding decisions are mostly determined by the transaction motive. Our findings indicate that companies in SEE do not pursue a cash optimization policy. They largely follow the pecking order pattern and the cash holding of the firm is mostly determined by means of the relationship between the capital investments and internally generated funds.

Real earnings management and idiosyncratic return volatility

PurposeHigher real earnings management (REM) reduces financial reporting quality and increases the uncertainty of future cash flows and profitability among investors. This study asserts that REM-induced noise increases idiosyncratic return volatility (IVOL), aims to examine the association between REM and IVOL and further investigates whether information asymmetry, firm life cycle and economic policy uncertainty (EPU) moderate the association between REM and IVOL.Design/methodology/approachThe authors use 94,445 firm-year observations from the US over 1987 to 2019 and test this study’s hypotheses using ordinary least square regressions with robust standard errors clustered by firm. The authors use change analysis, two-stage models and the impact threshold of the confounding variable analysis to address endogeneity.FindingsThe authors find that REM increases IVOL. This positive association is more pronounced for firms with more information asymmetry, for firms in the mature stage of the life cycle, compared with their growth-stage counterparts; and during periods of high EPU.Originality/valueExtant research suggests that accrual manipulation increases IVOL. However, the shift from accrual manipulation to REM and the managerial preference towards REM suggests that it is important to explore the impact of REM on IVOL. Thus, the authors enhance the understanding of the impact of earnings management on IVOL by documenting that REM-induced noise increases IVOL. The authors further extend the limited research on the consequences of REM and report an adverse consequence.

Protection of trade secrets and value of cash holdings: Evidence from a natural experiment

We examine whether the protection of trade secrets by restricting the mobility of knowledgeable employees through the adoption of the legal Inevitable Disclosure Doctrine (IDD), an exogenous event, increases the marginal value of corporate cash holdings by reducing the uncertainty of future cash flows, and how that value differs across firms in IDD recognizing and non- recognizing states. We find that the marginal value of cash holdings increases (decreases) significantly in states in which the IDD has (not) been recognized through increases (decreases) in firm value and performance. A battery of robustness tests reveals that the effect of the IDD is more pronounced in firms with high R&D activities. Overall, the evidence shows that the IDD acts as a mechanism that inhibits the mobility of key employees and, thus, reduces the probability of the misappropriation of knowledge-based human capital assets. That is, the IDD creates an opportunity for firms to efficiently use cash to increase firm value - rather than using cash to protect trade secrets from rivals.

Unreliable Accounts: Governing behind a Veil

Abstract This paper serves as a commentary to Professor Ramanna’s paper, “Unreliable Accounts: How Regulators Fabricate Conceptual Narratives to Diffuse Criticism.” The case analyzed by Professor Ramanna is the case of CON 8 in which the FASB changed the qualitative characteristics originally identified in CON2 to eliminate the concept of reliability from those qualities accounting data must possess before such data is decision useful. This commentary intends to add some historical depth to the particular case analyzed by Professor Ramanna to demonstrate that conceptual veiling has been a continuous process since the FASB’s original concepts statements that created a conceptual framework made up of two conflicting narratives, i.e. a mixing of the language of two metaphors for accounting. These two metaphors are “accountability” and “information.” The fateful error that has plagued the concepts statements with incoherence since the FASB began was the repurposing of accounting to that of “decision usefulness.” Decision usefulness as defined by FASB had to contain the property of prediction, explicitly predicting the timing, amount and uncertainty of cash flows. However, information is always “about something;” it is not a free-floating abstraction. Since knowledge about the future in economic affairs has eluded the ability of economists and likely always will, FASB is allegedly providing information about the future for which is has not any noteworthy expertise. CON 8 is just another stage of the growing incoherence of the concepts project. The norms of double entry accounting that developed over centuries and shaped accounting’s fundamental concepts served the purposes of accountability for which information to be information must be reliable. The entire edifice of science would collapse if scientific information were not reliable. Without reliability, the boundary between information and misinformation is blurred to the point of invisibility. Professor Ramanna’s analysis provides great insight into the absurdity standard setters now endorse that information does not have to reliable!

A novel depreciation approach in an uncertain environment: interval type-2 fuzzy sets in the maritime industry.

This study aims to propose a novel model for the determination of depreciation in an environment of uncertainty. In the study, amortization methods were modified through interval type-2 fuzzy, and a new approach was proposed to help investors make decisions in an environment of cash flow uncertainty. We provide options among different depreciation alternatives for the future investment decisions of maritime companies through the revision of the straight-line depreciation method and the double-declining balance depreciation method. The fuzzy depreciation alternatives we suggest in our study are not only suitable for maritime companies, but also companies in different industries.

How Do Tax Certainty Measures Affect Optimal Investment under Cash Flow and Tax Uncertainty?

How Do Tax Certainty Measures Affect Optimal Investment under Cash Flow and Tax Uncertainty?

MOTIVATION, STRATEGY, DIGITAL MARKETING: MSME SUREFIRE MOVES TO SURVIVE IN THE MIDST OF THE COVID-19 PANDEMIC

This service activity aims to analyze the needs and build a digitalization mindset for MSMEs in Malang City in facing the challenges of the Covid-19 Pandemic. Digital marketing strategies can be a bridge for MSMEs to reach a wider target market, so an interpersonal approach is needed to encourage business people to renew targeted marketing strategies. The method of implementing this activity consists of three stages, namely pre-implementation, implementation and post-implementation. The findings on the activity contain interesting facts, including MSMEs in Malang City do not experience capital problems, cash flow uncertainty causes a reduction in production activities, features on online platforms have not been used optimally and difficulties in compiling interesting content that can create interaction with the target market. Significant results were shown by MSME actors after participating in counseling and training activities, namely MSME actors were able to determine an online platform that could support their marketing system and some MSME actors were able to create interactions with consumers through digital activation to the purchase process from consumers. Apart from that, there are still many things that must be improved by MSME actors, especially in improving the quality of human resources and the digital marketing system.

IMPLEMENTATION EFFECTS OF IFRS 15 REVENUE FROM CONTRACTS WITH CUSTOMERS ON FINANCIAL REPORTING TRANSPARENCY OF COMPANIES IN THE REPUBLIC OF CROATIA

Revenues as an inflow of economic benefits in the form of assets increase or liabilities decrease are in the focus of managerial activities of every profit-oriented company. Meeting the business objectives of most companies is evaluated directly by the revenues level or indirectly by using revenue-based financial indicators like return on assets, profit margin, earnings before interests, operating earnings. From the aspect of external stakeholders, the importance of revenues is evident in independent auditor's reports, where revenue recognition is emphasized as a key audit matter in 27% of listed companies in the Republic of Croatia in 2019. In the context of considering revenues as a necessary basis in the business decision-making process, the issue of their recognition in accounting is crucial. With the objective to provide a more robust framework for revenue recognition, ease comparisons in industry, with capital markets, economy, and to offer relevant information to financial statements users in notes to financial statements, the International Accounting Standards Board issued new accounting standard in 2014 which establish the principles that an companies shall apply for revenue recognition from contracts with customers, as well as disclosure requirements in notes to financial statements. The aim is to report useful information to users of financial statements about the nature, amount, timing and uncertainty of revenue and cash flows arising from a contract with a customer. After two years of application of IFRS 15 Revenue from Contracts with Customers the question is what are the effects of the Standard on the disclosure of qualitative and quantitative information in the notes to the financial statements and have more transparent and robust revenue recognition rules resulted in changes in business performance? This paper aims to investigate and evaluate the effects of the application of IFRS 15 Revenue from Contracts with Customers on qualitative improvements in the informative value of revenue disclosures in the notes to financial statements in the Republic of Croatia. In addition, this paper aims to evaluate the quantitative effects of the application of the Standard on the level of presented revenues for the same sample of companies. The sample of enterprises includes about forty enterprises of those industries for which the effect of the application of the new Standard was assessed as the most significant (e.g. telecommunications, construction, shipbuilding). The obtained data were analysed by content analysis method and other applicable methods of inferential statistics.

The effect of skilled labor intensity on corporate dividend payouts

AbstractThis study shows that skilled labor‐intensive firms have lower dividend payouts. A one standard deviation increase in skilled labor intensity on average results in a 0.74 percentage point decline in the propensity to pay dividends and a 0.72 percentage point decrease in the dividend payout ratio. Our evidence suggests that greater labor adjustment costs (LACs) of skilled labor increase future cash flow uncertainty, which discourages managers from paying dividends. Consistently, we find that an exogenous increase (decrease) in LACs following the shock of 2017 H‐1B policy changes (the shock of 2005 Hurricane Katrina) leads treated firms to lower (heighten) their dividend payouts. Collectively, these findings indicate a strong dampening effect of LACs on corporate dividend payouts.

Academic Tenure, Income Uncertainty, and Real Estate Risk-Taking

While real estate investment via home ownership is inherently risky for all owners, individual households face varying degrees of risk that may affect the decision to rent versus own. The uncertainty of future cash flows to an enterprise or household is likely to influence investment behavior in large, long-lived capital such as real estate. This study uses a unique data set of university professors to estimate risk preference sensitivity to changes in the degree of uncertainty of labor income. A structural modeling econometric approach indicates that nontenured professors, who have the least secure incomes, are 33% less likely to own a home than their tenured colleagues, despite having similar average incomes. For those with tenure, 38% of their home ownership can be explained by academic tenure. Our calculations indicate that 124,729 tenured professors decided to purchase a home solely because of the job security tenure entails: roughly .2% of the total U.S. national housing stock.

The Effects of Trade War Risk on U.S. Financial Markets

Existing studies usually investigate the effects of Trump’s war on U.S. financial markets by the event-study method. We take an alternative approach by integrating war-related news into one single trade war shock based on a structural vector autoregression model identified via event day heteroscedasticity and then exploring its effect on various financial variables. We find that the identified war shocks consist of both growth news shocks and risk premium shocks. The former reflects shocks to investors’ cash-flow expectations, and the latter arises from shifts in the risk appetite or changes in the cash-flow uncertainty, both of which not only generates significant impacts on financial variables such as stock prices, treasury yields, and BAA corporate bond spreads but also explains a sizable fraction of their fluctuations. Additional analyses that employ stock prices in the S&P 500 index to explore the role of firms’ global value chain exposure during the war show that firms with high output exposure to China’s market suffer significantly more from the war, while input exposure does not cause a persistent significant difference.

Pension return assumptions and shareholder-employee risk-shifting

Firm managers of defined-benefit (DB) pension plan sponsors reveal their primary motives — risk-shifting or risk-management — through their assumed expected rates of return (ERRs) on the plan assets. Managers with risk-shifting motives choose high ERRs to exploit flexible internal financing from employees via pension underfunding. Those with risk-management motives choose low ERRs to reduce future cash-flow uncertainty by improving the pension funding status. We examine if ERRs predict the firms’ future cash-flow allocation between pension funding and corporate investments, in a Japanese sample that mitigates the selection bias concern for US DB plan sponsors. Using dynamic panel regressions that control for lagged dependent variables, firms’ business prospects, and unobserved fixed effects, we show that higher ERRs precede higher capital investments, R&D expenses, and net pension obligations while revealing managerial aggression, especially among firms with high external financing costs. Higher ERRs predict higher market-to-book ratios for the firms with larger R&Ds and/or underfunding, suggesting that the risk-shifting channel of internal financing with high ERRs can help alleviate underinvestment problems.