Corporate Treasurers Research Articles

Exploring the Impact of Digital Shared Services in Finance on Corporate Treasurers’ Job Anxiety

Abstract It has become a trend for enterprises to establish financial shared service centers for digital financial transformation, but the emotional impact of this transformation on the original financial staff of enterprises has been neglected. In this paper, we collect relevant intranet texts of enterprises, mine the emotions of the collected texts through the LDA theme algorithm, use the improved LSTM model to classify and identify the emotions of the collected texts, and construct the LDA-BiLSTM sentiment analysis model to analyze the anxiety condition of the financial staff of enterprises. The efficiency of LDA can be improved by using the weighted median to deal with outliers. Two LSTM networks are combined to form a BiLSTM network to improve the problem of inaccurate judgment of sentiment indicators by a single LSTM. Finally, the model is used to empirically analyze the emotions of financial staff before and after the transformation of an enterprise’s financial digital service. Negative feelings that are linked to anxiety have an accuracy rate of 95.23%. The frequency of separation after the transition was as high as 0.5, and the frequency of dismissal was as high as 0.423. Overall sentiment scores were lower than 0.7. After the transition, the number of people worried about negative feelings related to anxiety rose from 32% to 64%. Finance professionals are experiencing a significant increase in anxiety due to the post-transition of the enterprise.

Hedge accounting and investors’ view of FX risk

Purpose This paper aims to examine the foreign exchange (FX) risk effects of cash flow hedge accounting (HA). To the extent the HA qualification criteria and detailed documentation give investors confidence that FX derivatives effectively hedge risk, market-assigned FX risk premiums will be lower for firms using cash flow HA. Design/methodology/approach Probit analyses rely on the HA designation to examine the decision to use cash flow HA. Primary analyses test the hypothesized relationship between the magnitude of FX risk premiums and such HA use. Additional analyses allow for the interaction between cash flow HA use and the extent of FX derivatives use. Findings Hypothesis tests indicate that the magnitude of the FX risk premium is, on average, lower for firms designated as effective cash flow hedgers. In additional tests, the evidence suggests that the market assigns a lower FX risk premium to firms using a higher level of FX derivatives as effective cash flow hedges. Practical implications The findings suggest that cash flow HA provides risk-relevant information to investors. Such positive effects of HA on investors’ understanding of risk management may guide US accounting regulators in their efforts to improve HA. Corporate treasurers also may benefit from these insights into evaluating the use of HA. Originality/value Responding to the call for research on the risk relevance of cash flow HA, this paper merges the HA literature with the FX risk management literature to directly examine the relationship between HA use and FX risk premiums for manufacturing firms. The authors take an innovative approach using FX rates to which each firm is most exposed and provide evidence consistent with the argument that this approach is helpful in understanding both the decision to use cash flow HA and the effect of such HA use on market-assigned FX risk premiums.

The impact of accounting standards on hedging decisions

PurposeThe purpose of this paper is to study the effects of financial accounting standards on the economic decisions of managers. The primary research question addressed in the paper is whether the hedging behavior of corporate treasurers in France has been affected by the issuance of International Accounting Standard No. 39 and International Financial Reporting Standard No. 9 dealing with financial instruments and hedging.Design/methodology/approachIn all, 48 semi-structured interviews were conducted with French corporate treasurers. The interview instrument is included as an exhibit to this paper. The interviews were recorded and transcribed. In addition, three interviews were conducted with representatives of Big 4 audit firms who are experts in accounting for financial instruments. The empirical findings are interpreted using a theoretical framework derived from Jean Baudrillard who argues that the “map” (accounting results) tends to define the “territory” (economic decision-making) in a period of “hyperreality” (when the underlying economic reality is confused). In other words, accounting standards, and the reported numbers that result from such standards, can influence the economic decisions of managers and not merely represent the outcome of economic decisions already taken.FindingsCorporate treasurers often make decisions based on earnings impact. This finding is similar to findings in prior literature regarding the effects of accounting standards on economic decisions taken by managers. A fear of increased earnings volatility is central to the treasurers’ concerns. Also key is the complexity of the process for qualifying financial instruments for hedge accounting treatment. The authors also find that the behavior of corporate treasurers is neither stable nor homogeneous. The behavior appears to be the outcome of a collective learning process in which the corporate treasurer is only one actor.Research limitations/implicationsThe type of qualitative research undertaken in this study has its limitations. It cannot be demonstrated that the findings are generalizable. There is a contextual specificity to the treasurer’s function, which reinforces a particular focus on accounting results. The CFO is simultaneously the superior of the treasurer and responsible for financial reporting, and consequently subject to a conflict of interest that does not necessarily apply to other types of managers. Therefore the findings cannot apply to all managerial functions.Practical implicationsThe authors found that corporate treasurers focus on accrual-based earnings despite engaging in a function that is supposed to focus on cash flows. Even if the IASB believes that accounting standards should be used primarily by investors and creditors, they should acknowledge that there is a fear of earnings volatility by managers, and that there is an temptation toward increased use of other comprehensive income as an alternative to reporting volatile earnings numbers.Social implicationsThe research provides support for those who argue that international accounting standards that require fair value accounting for financial instruments have had a negative pro-cyclical impact on the real economy.Originality/valueThis paper is a qualitative research study conducted in an area of research where there have previously been only quantitative studies. The access to a large number of French corporate treasurers is unique. The study supports prior findings regarding the influence of accounting standards on managerial behavior, but with an added theoretical interpretation related to Baudrillard’s arguments regarding the nature of the “map” and the “territory” in complex economic systems.

An Empirical Investigation on Spot and Futures Market With Reference to Energy Sector on NSE

The importance of volatility is widespread in the area of financial economics. Equilibrium prices, obtained from asset pricing models, are affected by changes in volatility, investment management lies upon the mean-variance theory, while derivatives valuation hinges upon reliable volatility forecasts. Portfolio managers, risk arbitrageurs, and corporate treasurers closely watch volatility trends, as changes in prices could have a major impact on their investment and risk management decisions. Volatility may be defined as the degree to which asset prices tend to fluctuate. Volatility is the variability or randomness of asset prices. Volatility is often described as the rate and magnitude of changes in prices and in finance often referred to as risk. This study has been carried out on Spot and Futures market with reference to energy sector stocks on NSE. It also analysed the co-integration and Causal relationship between Spot and Futures prices of stocks and index. The study also estimated the impact of Spot market on Futures market. The study has been carried out on volatility of Indian Stock Market represented by S&P CNX Nifty Index along with influence by energy sector stocks.

A contemporary view of corporate finance theory, empirical evidence and practice

This article uses a survey of Australian corporate treasurers to shed light on the gap between the theory and practice of corporate finance in Australia. Seven areas are examined: capital structure, payout policy, cash holdings, initial public offerings, seasoned equity offering, mergers and acquisitions, and corporate governance. We also exploit the global financial crisis (GFC) to examine the effect of liquidity shocks on a firm’s capital structure choices. We then compare our Australian survey results with results from a comprehensive US survey conducted by Graham and Harvey. Our survey shows that the board of directors plays the most important role in determining capital structure decisions and that corporate treasurers play the most important role in cash holding decisions. This contrasts with the academic literature that has typically focused on the role of chief executive officer (CEO) in both capital structure and cash holding decisions. In addition, our respondents do not view the tax advantage of interest deductibility to be of first order of importance for debt issuance choices, which contrasts with most of the US empirical studies. Finally, we juxtapose the theory–practice perspective, with a review of the most recent 5 years (2011–2015) of corporate finance research published in the leading Asia Pacific Basin finance journals.

Benefits of Using a Single‐Account Cash Management Structure

The implementation of single‐account cash management systems provides corporate treasurers with better visibility and greater control over cash. Firms should reexamine their internal processes and look for opportunities to implement a payments‐on‐behalf‐of (POBO) and collections‐on‐behalf‐of (COBO) as part of a single‐account cash management system. It provides significant cost savings and reduces risks associated with cash management. Many financial institutions such as banks have set up the services needed to do single‐account cash management. Therefore, treasurers should look to single‐account cash management systems as a means to achieve the next level of efficiency in cash management. © 2015 Wiley Periodicals, Inc.

Letter From the Editor

Letter From the Editor

Information Security and Cloud-Based Computing: Tools for the Corporate Treasurer

This article describes cybersecurity issues for the financial treasurer. Although job descriptions for corporate treasurers probably don't mention systems and information security, many treasury services are now digitized, which raises the risk of information being compromised by hackers, malware, or computer viruses. In this information technology (IT) environment, treasury officials are increasingly being asked to justify the steps being taken to secure and control the electronic transactions and digitized data under their jurisdiction. This article will help by describing practices and tools available to secure modern financial processing systems from unauthorized access. © 2015 Wiley Periodicals, Inc.

Working capital management during the global financial crisis: the Australian experience

Purpose – This paper aims to document the measures taken by Australian corporate treasurers in the areas of cash, inventory, accounts receivable, accounts payable and risk management to survive the global financial crisis (GFC). Design/methodology/approach – Using qualitative techniques like interviews and a survey questionnaire, this paper summarises the various measures adopted by working capital managers. Findings – The results show that more than half of the participants in the survey altered their working capital management practices during the crisis. Capital expenditure was curtailed, as they aimed at preserving their cash levels while reducing inventory levels. Credit worthiness of institutions became more important, and there was a general decline in credit availability. The results also show that Australian working capital managers exhibit behavioural biases, particularly overconfidence. Originality/value – It is the first paper that uses open-ended questions to capture the effects of the GFC on working capital management in Australia.

A behavioural finance approach to working capital management

This paper documents the behaviour of corporate treasurers who are involved in the decision-making process in the areas of cash, inventory, accounts receivable, accounts payable and risk management during the global financial crisis. Using a survey questionnaire, we attempt to find out if working capital managers are prone to certain heuristic-driven biases, such as loss aversion, high confidence level, anchoring and self-serving biases. Our findings show that these professionals exhibit signs of behavioural biases. Although the biases lead to sub-optimal decisions in certain areas of working capital management (WCM), they can also be desirable attributes in other aspects of WCM. We propose a profile of a good working capital manager.

Transfer pricing for inter-company services: What corporate executives and practitioners should know

Compliance with corporate tax rules rarely requires the involvement of executives outside the tax department. But for multinational enterprises, one area of corporate tax compliance that does require such attention is transfer pricing — specifically for inter-company services. From the chief executive to engineers on the manufacturing floor, the transfer pricing rules in the US and most developed countries require that their activities be tested according to local corporate tax and transfer pricing rules and regulations, to support the deductibility of their costs in either domestic or foreign locations. The testing process often involves fact gathering and analytical techniques that typically require the involvement of senior corporate executives to document how their efforts benefited either domestic or foreign business operations. Failure to prepare this analysis adequately can create significant tax risk for the enterprise and loss of deductibility for these expenses. It is therefore important that corporate executives have some awareness of international transfer pricing compliance requirements for their activities, and the implications for the enterprise. Corporate treasurers and tax and financial managers should also understand the techniques of transfer pricing compliance for services, and how these techniques can affect the enterprise’s financial position and tax examination risk. The views expressed herein are those of the author and do not necessarily reflect the views of Ernst & Young LLP or any other member firm of Ernst & Young Global Limited.

Financial risk management in treasury

A recent SunGard AvantGard study of 222 treasury professionals in more than 25 countries conducted in the second quarter of 2012 reveals how treasury professionals are addressing various aspects of financial risk. Having a strategy in place to deal with financial risk is of utmost importance to today’s treasury professionals in light of recent tumultuous economic conditions and failed financial risk policies. The SunGard study showed that corporate treasurers expressed the greatest concerns surrounding market volatility and eurozone defaults. The study also exposed several issues that could hamper effective risk management, including reliance on manual methods to conduct risk analysis and inability to measure real-time positions. Reliance on spreadsheets for conducting advanced risk analysis opens the door to significant operational error along with potential regulatory conflicts, while an inability to view market positions in real time could hamper the capability to manage market volatility in a portfolio. Going forward, an opportunity exists for companies to enhance their technology to address potential gaps in risk-management methods.

Corporate liquidity disclosures: A review

AbstractCorporate treasurers and controllers know that liquidity and credit risk grabbed the attention of investors and creditors during the 2008 financial crisis. Suddenly everyone saw the risks to companies from questionable financial instruments. And critics asked, “Where were the risk managers? Why did the CFOs and treasurers not highlight these risks?” Because corporate treasurers and controllers are involved in managing and reporting on corporate liquidity, they may want to review the SEC's liquidity disclosure requirements detailed in this article. That review will help ensure that their companies' disclosures fully reflect such requirements—and highlight the important risks for investors. Now that the world economy seems to be weakening again, that review is even more important. And it also seems wise to take a look at certain proposed FASB disclosures on liquidity risks that are covered in this article—and to consider how these may affect future financial reports. © 2012 Wiley Periodicals, Inc.

Shooting the Messenger: The Fed and Money Market Funds

To some in the MMF industry, the Fed seems on a mission to eradicate MMFs from the financial system. Although the Fed has no direct regulatory jurisdiction over MMFs, the Fed is pushing for major regulatory changes that MMF representatives say would destroy this $2.5 trillion industry. MMFs serve as efficient short-term cash management vehicles and investments for corporate treasurers, pension funds, and individual investors. They are major purchasers of commercial paper issued by U.S. businesses to finance their payrolls, inventory, and cash flow. They also hold large amounts of securities that finance municipalities. They have a stellar record of safety, far superior to that of banks. Then why is the Fed attacking this important financial sector? This paper examines the reasons cited by the Fed and finds them to be misleading and wrong.

Does Debt Make Firms Weak Competitors? Evidence Using U.S. Stock Returns

Prior studies examine real firm behavior and show that high debt makes a firm vulnerable in the product market. In this study, we assess the economic magnitude of competitive effects of debt by examining stock returns. For identification, we use a double-layer of contrasts by conditioning our tests across the business cycle and varying product differentiation environments. Firms with high relative-to-industry debt experience significantly lower stock returns during recessions but similar returns during normal times compared to firms with low relative-to-industry debt. The results are driven by the sub-sample of firms with low product differentiation where the competitive effects of debt should be the strongest. Returns are 9% lower during recessions for firms with above industry median debt in this sub-sample. This finding is robust to alternative explanations such as endogeneity, mechanical leverage effects, business risk, debt overhang, and customer warranty concerns. We also link real effects to stock returns by showing that debt-induced sales growth is a significant determinant of stock returns. Our finding that the competitive effects of debt have an economically significant effect on stock returns is important to investment bankers who advise firms on capital structure decisions, chief financial officers, corporate treasurers, and equity money managers.

Is it time for a world currency unit?

AbstractA supranational currency, the World Currency Unit (Wocu), has recently been introduced. It creates potential opportunities for currency and risk management for businesses involved with international transactions. The authors look at the issues of a world currency, including how corporate treasurers can use it. © 2010 Wiley Periodicals, Inc.

Organizational Structure and Fund Performance: Pension Funds vs. Mutual Funds

This paper examines how the organizational structure of the defined benefit pension fund industry influence the investment decision and performance of pension fund managers. Corporate treasurers, who have an incentive to reduce their own job risk, tend to hire pension fund managers with low tracking error. This may constrain pension fund managers in their ability to implement certain profitable investment strategies. Consistent with this hypothesis, I find that relative to mutual funds, pension funds engage in less active management, are less aggressive in implementing momentum strategies, and are more likely to tilt their trading towards stocks in their benchmark. Moreover, these investment decisions have important performance implications. If pension funds implemented mechanical momentum strategies to the same extent as mutual funds, they would enhance the gross performance of their trades by roughly 30 basis points per quarter. In addition, the trades made by pension funds in stocks outside of their benchmark significantly outperform their trades in benchmark stocks. After controlling for risk and transaction costs, I estimate that pension funds tendency to tilt their trading towards stocks in their benchmark weakens the performance of their trades by roughly 30 basis points per year. The results suggest that the additional layers of delegation in the pension fund industry generate economically meaningful agency costs.

Opinion piece: How can banks and corporates work together more effectively to generate value?

SEPA is here but the market hasn't seemed to notice. Too much uncertainty still exists on key aspects of SEPA, including pricing. A majority of corporates are dissatisfied with the basic SEPA instruments. Without Additional Optional Services (AOS) and more flexibility in The European Payments Council (EPC) rulebooks, SEPA will have serious trouble in reaching a critical mass. It is time for a new roadmap, this time one shared by all stakeholders. Payments are becoming a commodity and SEPA will make banks lose revenues. The European Commission is holding out a big 'carrot' to them — e-invoicing. The EC Expert Group must draw the 'framework' that allows e-invoicing to take off, especially with small and medium enterprises (SMEs). Banks hope to play a major role and to discover new sources providing financial supply chain (FSC) dematerialisation and trade financing. The European Association of Corporate Treasurers (EACT) is participating in the effort with its Corporate Action for Standards (CAST) projects

Transfer Pricing for Corporate Treasury in the Multinational Enterprise

Intercompany financing transactions are becoming increasingly important to multinational enterprises (MNEs) as they expand internationally. Corporate treasurers of MNEs have many responsibilities, including the management of international capital structure and cost of capital, the financing of cross‐border acquisitions, foreign direct investment, international capital budgeting and cash management, management of foreign exchange and transactional risk, and port‐folio and investment management.This article focuses on a corporate function, transfer pricing, that is potentially relevant to each of these activities. Whenever a payment crosses borders in a treasury context—whether to provide a loan, purchase a receivable, provide a guarantee, sweep cash, factor a receivable, provide a hedge or insurance product—a transfer pricing issue is present. Transfer pricing is often viewed as a taxation issue and thus the responsibility of the corporate tax department. This article challenges that view, and makes the case that an integrated, multi‐functional approach to MNE treasury planning in the context of transfer pricing can be an important component in improving the efficiency of cross‐border financial management. The paper uses conceptual and empirical information as well as numerical examples to illustrate relevant tax and transfer pricing concepts for policy planners and others responsible for MNE treasury and tax planning.

Understanding corporate clients: Why banks need to rethink their business models and approach to client relationship management

Corporate treasurers need banks to provide advisory driven cross-product responses to their business issues, while maintaining access to the bank's product specialists. On the one hand, given the need to maintain product specialisation, banks face potential hurdles and challenges to execute a cohesive advisory response across products. On the other hand, banks who have successfully adopted an integrated client management response have demonstrated a 40 per cent average increase in their returns on a representative sample of corporate customer relationships. The treasurers obtain a higher quality of advice and solutions execution from their bankers and, in return, will allocate more profitable wallet to the bank that can provide it. This ultimately improves the treasurer's ability to address critical business issues. Implementing a treasurer's agenda programme in a bank requires an origination process that unites product business lines. It is also heavily dependent on an advisory–sales driven approach. Medium sized and regional banks have demonstrated a time to market competitive advantage over global banks in implementing a treasurer's agenda programme for similar customers. This is mainly due to the ability of non-global banks to overcome thorny trade-off issues across product lines more quickly, and to have less complex product and geographic organisations.