Expected Cash Flows Research Articles

Do LGBT-Supportive Corporate Policies Improve Credit Ratings? An Instrumental-Variable Analysis

We investigate the effect of Lesbian, Gay, Bisexual, and Transgender (LGBT)-supportive corporate policies on credit ratings. To the extent that LGBT-friendly policies are beneficial to the firm and therefore improve its expected cash flows, credit rating agencies should assign more favorable credit ratings to the firm. To alleviate endogeneity concerns, we exploit the variations in the LGBT populations across the states in the U.S. as our instrument. Our instrumental-variable (IV) analysis reveals that firms that adopt LGBT-supportive corporate policies enjoy better credit ratings, supporting the stakeholder and good management hypothesis. Further analysis using propensity score matching also yields consistent results.

The Theory and Practice of Corporate Risk Management: Evidence from the Field

AbstractWe survey more than 1,100 risk managers from around the world regarding their risk management policies. We find evidence consistent with some traditional theories of risk management, but not with all. We then study “why” or “why not” firms hedge and find that almost 90% of risk managers in nonfinancial firms hedge to increase expected cash flow. We also find that 70% to 80% of risk managers hedge to smooth earnings or to satisfy shareholders’ expectations. Our analysis also suggests that regulatory changes implemented to increase market stability (e.g., Dodd‐Frank Act) could discourage corporate hedging. Finally, we provide evidence regarding hedging in six areas of risk: interest rate, foreign exchange, commodity, energy, credit, and geopolitical. We find that operational hedging is more common than financial hedging in all risk areas except foreign exchange.

Effect of Foreign Exchange Risk Hedging Techniques on Financial Performance of Listed Firms in Kenya

The adoption of floating foreign exchange rate regime in the 1990s and international trade have led to increased exposure of Kenyan firms to foreign exchange risk. Foreign exchange risk can affect a firm’s expected cash flows, and by extension, its financial performance. This paper examines the effects of foreign exchange risk hedging techniques on the financial performance of publicly listed firms in Kenya. The target population constituted all the 54 firms that were continuously listed on the Nairobi Securities Exchange during the study period, from 2011 to 2016. The study used panel data research design. Secondary data was obtained from financial statements of the listed firms. The data was coded and analysed using descriptive and inferential statistics—correlation and regression—with the aid of STATA software. The feasible generalised least square model was used to test the hypotheses. The results show currency hedging has a positive effect on financial performance. This implies that when hedging strategies and hedging tools are implemented appropriately, they help firms achieve their financial objectives, increasing financial performance, hence creating value for shareholders.

Pricing formulae for derivatives in insurance using Malliavin calculus

In this paper, we provide a valuation formula for different classes of actuarial and financial contracts which depend on a general loss process by using Malliavin calculus. Similar to the celebrated Black–Scholes formula, we aim to express the expected cash flow in terms of a building block. The former is related to the loss process which is a cumulated sum indexed by a doubly stochastic Poisson process of claims allowed to be dependent on the intensity and the jump times of the counting process. For example, in the context of stop-loss contracts, the building block is given by the distribution function of the terminal cumulated loss taken at the Value at Risk when computing the expected shortfall risk measure.

Using Fair Value Earnings to Assess Firm Value

SYNOPSISWhether fair value accounting should be used in financial reporting has been the subject of debate for many years. A key dimension to this debate is whether fair value earnings can provide information to financial statement users that is helpful in making their economic decisions. A criticism of fair value accounting is the contention that fair value earnings simply reflects “shocks” to value, and thus cannot be used to assess firm value. We show how fair value earnings can be disaggregated into components that can be used to assess firm value, as well as components that provide information about various types to shocks to value, e.g., effects of changes in expected cash flows.

The influence of uncertainty on the standard-setting decision between fair value and historical cost accounting under asymmetric information

The design of accounting rules by the international standard-setters takes place by considering a trade-off between relevance and reliability. An example for this trade-off is the standard-setting decision between fair value accounting—associated with more relevant information—and historical cost accounting—associated with more reliable information. This paper examines in which way the decision of a standard-setter between fair value and historical cost accounting is influenced by the uncertainty of the underlying assets, if the standard-setter wants to minimize the social costs of his standard-setting decision. As a first step this paper uses a common signaling model: Good firms—i.e. firms with high expected cash flows in the future—signal their firm type to an analyst by using discretionary accruals to manage earnings. As a second step the resulting signaling costs are compared with the analyst’s costs for determining the firm type by using his own valuation technology. The standard-setter chooses the accounting rule that minimizes the social costs.

Size-Related Premiums

This paper theoretically links the stock characteristics size and value to risks. The size premium arises – and spans the value premium – exclusively for portfolios formed in high market price of risk states. This is when the cross-sectional differences in risk premiums dominate the differences in expected cash flows connecting size and risk. Otherwise, value links better to the same risks, as it scales size by a proxy for expected cash flows. The hypothesis that value and size are (constant) risk proxies is formally rejected in the data, challenging the use of size-related portfolios as risk factors along with several strands of the literature based on this hypothesis.

Does Enterprise Value Really Depend on WACC and Free Cash Flow? The Evidence of Irrationality from the Oil and Gas Sector

The main objective is to check whether traditional DCF model, based on stable rational expectations for cash flows and discount rates really works in an intermediate term-from a quarter to three years. The sample was formed from six major companies of oil and gas sector. The main conclusions are-changes of enterprise value are independent of the changes WACC, free cash flow, and operating cash flows. This may be explained by the impossibility to make durable assessment neither for expected cash flow nor for the discount rate, which in fact means failure of strongly rational models like CAPM or MM. To handle out this implied irrationality the new model proposed, based on the stochastic cost of capital, which follows the model of generalized method of moments by J. Cochrane.

The Theory and Practice of Corporate Risk Management: Evidence from the Field

We survey more than 1,100 risk managers from around the world on their risk management policies, goals, and perceptions. We find evidence consistent with some of the traditional theories of risk management, but not with all. We then analyze the reasons beyond “why” or “why not” firms hedge. We find that almost 90% of the risk managers in non-financial firms hedge to increase expected cash flows. We also find that 70%-80% of the risk managers say that they hedge to smooth earnings or to satisfy shareholders’ expectations. Our analysis also suggests that regulatory changes (e.g., Dodd-Frank Act of 2010) and new accounting rules put in place to increase market stability might discourage corporate hedging. Finally, we provide comprehensive evidence about hedging in the context of six forms of risk: interest rate, foreign exchange, commodity, energy, credit, and geopolitical risk. Among other things, we find that operational hedging is more common than hedging with financial contracts in all risk areas except foreign exchange.

Contracting in a Continuous-Time Model with Three-Sided Moral Hazard and Cost Synergies

We study optimal effort and compensation in a continuous-time model with three-sided moral hazard and cost synergies. One agent exerts initial effort to start the project; the other two agents exert ongoing effort to manage it. The project generates cash flow at a fixed rate over its lifespan; cash flow stops if a failure occurs. The three agents' efforts jointly determine the probability of the project's survival and thus its expected cash flows. We model cost synergies between the two agents exerting ongoing effort as one's effort reduces the other's cost of effort. In the optimal contract, the timing of payments reflects the timing of efforts as well as cost synergies across agents. The agent exerting upfront effort claims all cash flows prior to a predetermined cutoff date, and the two agents exerting ongoing effort divide all subsequent cash flows. Delaying payments motivate these two agents to work hard throughout. Between them, the agent with greater degree of moral hazard and bigger impact on reducing the other agent's cost claims a larger fraction of the cash flow. Our study sheds light on a broad set of contracting problems, such as compensation plans in startups and profit sharing among business partners.

The Strategic Responses from Sophisticated Investors to Inaccurate Forecast of Financial Analysts

We examine whether there are more information based trading activities that are generated around the time of earnings announcements. We distinguish between the influence of information based traders, especially short sellers, and market information quality through the reaction of participants to new information derived from corporate earnings announcements. We find that informed traders do take advantage of overpriced stocks, and do short stocks before the confirmation of past expectations of future cash flows from corporates. We apply Standardized Unexpected Earnings (SUE) in the method and our result indicates that informed traders are more likely to take advantage of overpriced stocks, using a tool (shorting) that is not traditionally used by unsophisticated investors. We also demonstrate an unique finding that informed traders follow stock analysts not for investing advice, but to take advantage of those unsophisticated investors that buy in to the rhetoric expressed by financial analysts.

Using Fair Value Earnings to Assess Firm Value

Whether fair value accounting should be used in financial reporting has been the subject of debate for many years. A key dimension to this debate is whether fair value earnings can provide information to financial statement users that is helpful in making their economic decisions. A criticism of fair value accounting is the contention that fair value earnings simply reflects “shocks” to value, and thus cannot be used to assess firm value. We show how fair value earnings can be disaggregated into components that can be used to assess firm value, as well as components that provide information about various types to shocks to value, e.g., effects of changes in expected cash flows.

Dynamic project selection

We study a normative model of an internal capital market, used by a company to choose between its two divisions’ pet projects. Each project’s value is initially unknown to all but can be dynamically learned by the corresponding division. Learning can be suspended or resumed at any time and is costly. We characterize an internal capital market that maximizes the company’s expected cash flow. This market has indicative bidding by the two divisions, followed by a spell of learning and then firm bidding, which occurs at an endogenous deadline or as soon as either division requests it.

Do LGBT-Supportive Corporate Policies Improve Credit Ratings?: An Instrumental-Variable Analysis

We investigate the effect of Lesbian, Gay, Bisexual and Transgender (LGBT)-supportive corporate policies on credit ratings. To the extent that LGBT-friendly policies are beneficial to the firm and therefore improve its expected cash flows, credit rating agencies should assign more favorable credit ratings to the firm. To alleviate endogeneity concerns, we exploit the variations in the LGBT populations across the states in the U.S. as our instrument. Our instrumental-variable (IV) analysis reveals that firms that adopt LGBT-supportive corporate policies enjoy significantly better credit ratings, supporting the stakeholder and good management hypothesis. Further analysis using propensity score matching also yields consistent results.

The Credit Quality and the Market- Based Performance of Banks: A Comparative Study

The Credit Quality and the Market- Based Performance of Banks: A Comparative Study Dr. Salah Ahmed ORABY Abstract This research aims at measuring the relationship between the credit quality measured by both non-performing loans % (NPL) and provisions for loan losses%(PLL) as independent variables and the market performance of banks measured by share prices.The sample study includes 11 Saudi listed banks in Saudi stock exchange and 15 banks listed in Jordanian stock from 2011 to 2016. This study used regression analysis and correlation analysis to analyze the quarterly data to test research hypotheses.Results of the Saudi case indicated that neither NPL% nor PLL has a statistically significant relationship with share prices and that can be interpret that investor in Saudi Arabia ignore both NPL and PLL when pricing shares of banks. On the other hand, results of the Jordanian case indicated that only PLLhave a statistically positive impact on share prices of banks.so it can be said that investors in Jordanian capital market look at part of provisions for PLL as a source of potential profit in future because they believe that PLL contain discretionary component used to manage earnings and used as signalingtool to shareholderson future expected cash flows. Also results indicated that both NPL and PLL are alternative measures should not be used together in the same model as predictors and PLL is better than NPL because PLL reflects both specific and general risk. Full Text: PDF DOI: 10.15640/ijat.v6n1a6

What Can we Learn from Stock Prices?: Cash Flow, Risk, and Shareholder Welfare

Price is expected cash flows discounted at the risk-free rate and a discount for risk exposure. Price-equivalency does not always imply welfare-equivalency: shareholders are not necessarily indifferent between a price increase of $1 from higher cash flows and the same $1 increase from lower risk exposure. Even in complete markets, if managers enjoy private benefits of control, the social planner may prefer lower risk exposure to a price-equivalent increase in firm value from greater investor protection. This has implications for event studies, the tradeoff between principal costs and agency costs, and the link between macroeconomic risk and corporate governance.

МЕТОДИЧНІ ЗАСАДИ ОЦІНЮВАННЯ ЕКОНОМІЧНОЇ ЕФЕКТИВНОСТІ ІНВЕСТУВАННЯ РОЗВИТКУ ПІДПРИЄМСТВ

Ensuring economic development of enterprises requires from them the investment of financial resources. Herewith there are many directions of such investment, methods and sources of financing of investment projects, in particular, the purchase of fixed assets and other assets. When adopting investment decisions on the acquisition of assets, the enterprise should compare the expected cash flows from the exploitation of these assets with the amount of investments in their purchase. Under such conditions, it appears a need for a retrospective assessment of the economic efficiency of investments in the acquisition of assets by enterprises in previous periods. The purpose of this article is to develop methodical bases for assessing the economic efficiency of investment in enterprise development. The method of assessing such efficiency for the totality of the available assets at the enterprise is developed, taking into account the terms of their acquisition and the value of net cash flow from their exploitation from the moment of their acquisition until the moment of assessment. It is proposed to evaluate the indicator of the period of achievement of the minimum required efficiency of investments in the development of the enterprise. This period represents the time interval between the moment of investing in the acquisition of assets of the enterprise and the moment when the received cash flow will provide the minimum acceptable level of economic efficiency of invested money. The article shows that the achievement of the minimum acceptable efficiency of investment in the development of the enterprise is a criterion for the success of its investment activity. The factors influencing the period of achievement of minimum acceptable efficiency of investment in the development of the enterprise are determined. Directions for reduction of this period are determined. In particular, they include the optimization of volumes of current assets of the enterprise. A model for determining the value of financial results of the enterprise, which will provide the minimum acceptable efficiency of funds that were invested in tangible assets of the enterprise in previous periods, is proposed. Implementation of the developed methodical principles for assessing the economic efficiency of investing in the development of enterprises in their practice will improve the monitoring of investments realized by enterprises and the process of regulating their investment activity.

Big data-driven stochastic business planning and corporate valuation

The research question of this paper is concerned with the investigation of the links between Internet of Things and related big data as input parameters for stochastic estimates in business planning and corporate evaluation analytics. Financial forecasts and company appraisals represent a core corporate ownership and control issue, impacting on stakeholder remuneration, information asymmetries, and other aspects. Optimal business planning and related corporate evaluations derive from an equilibrated mix of top-down and bottom-up approaches. While the former follows a traditional dirigistic methodology where companies set up their strategic goals, the latter are grass-rooted with big data-driven timely evidence. Real options can be embedded in big data-driven forecasting to make expected cash flows more flexible and resilient, improving Value for Money of the investment and reducing its risk profile. More accurate and timely big data-driven predictions reduce uncertainties and information asymmetries, making risk management easier and decreasing the cost of capital. Whereas stochastic modeling is traditionally used for budgeting and business planning, this probabilistic process is seldom nurtured by big data that can refresh forecasts in real time, improving their predictive ability. Combination of big data and stochastic estimates for corporate appraisal and governance issues represents a methodological innovation that goes beyond the traditional literature and practice.

Riscos e incertezas manifestos no valor econômico de um investimento: um estudo de caso da OGX Petróleo e Gás

No mercado financeiro e de capitais brasileiro, muitas são as opções de investimentos para os poupadores de recursos. Entretanto, a decisão por tais opções dependerá basicamente do perfil do investidor e do retorno esperado do ativo a que se queira investir. Tendo em vista a questão do retorno sob a forma de expectativa da geração de fluxos de caixa futuros, somados aos riscos diversos e à incerteza, tanto sob o aspecto macroeconômico quanto do próprio negócio da empresa investida, pode-se afirmar, de início, que a subjetividade utilizada na avaliação de um ativo ou um negócio seja um dos itens considerados na definição do seu valor econômico. Nesse sentido, o objetivo central deste artigo é analisar como o risco e a incerteza, aliados à formação das expectativas na avaliação de um investimento, se manifestam na formulação do seu valor econômico. A pesquisa documental deste trabalho foi focada na análise da empresa OGX Petróleo e Gás S.A. (OGX) compreendendo o período de 2008 a 2015. Alguns anos após a abertura de seu capital, foi constatado, pela OGX, que boa parte dos ativos anteriormente reconhecidos não apresentavam viabilidade na exploração de petróleo e gás natural, resultando no reconhecimento em seu resultado de perdas na forma de impairment, o que ocasionou a queda do valor de suas ações. Desse modo, com base nos resultados apresentados neste estudo, pode-se inferir que o risco e a incerteza, aliados a formação das expectativas, tiveram forte influência na avaliação do valor econômico da ação da OGX.

Vacancy Posting, Employee Value, and Asset Pricing

Expectations of returns and cash flows are linked to firms' labor search decisions. Using a dataset that covers the near-universe of online job vacancy postings, I show that vacancy rates negatively predict returns and positively predict cash flows in the cross-section of firms and industries. The predictive power of vacancy postings is strengthened for firms facing less favorable labor-market conditions. Incorporating the supply and demand information of the aggregate labor market, I construct a new measure of employment value that strongly predicts aggregate stock and bond market returns, even in the presence of other known predictors.