Financial Cash Flow Research Articles

Mental Accounting in Financial Reporting and Voluntary Disclosure

Those involved in financial reporting and voluntary disclosure routinely make decisions about how to describe transactions and economic events. Key components of these decisions include how to label information, whether to aggregate or disaggregate it, and how frequently to provide it. For example, firms reporting under IFRS rules must determine whether to label interest paid as an operating or financing cash flow. Analysts evaluating a firm’s compound financial instruments must decide whether to consider them as reported (i.e., as one unit of account) or bifurcate them into their component parts. The purpose of this paper is twofold: First, we describe a robust theory from psychology, mental accounting, that can help explain how those involved in financial reporting and voluntary disclosure might make these kinds of decisions and evaluate them. Second, we provide illustrative examples of how this theory can aid scholars in their research on financial reporting issues, including those currently facing standard setters.

The relative information content of operating and financing cash flow in the proposed cash flow statement

AbstractThis study compares the relative information content of the new specifications of operating and financing cash flow as proposed jointly by the IASB and the FASB with the specifications in SFAS No. 95. A unique feature of the study is the use of the Siegel and Biddle (1994) test of relative information content. The results indicate that the proposed operating cash flow measure has less relative information content than the current measure, and the results for financing cash flow are consistent with equity investors finding no significant difference between the current and proposed measures.

Audit Recognition to Falsified Methods in Financial Statements of Listed Companies in China

Falsified financial statements have already become an international and historic issue. How to judge and audit the falsified activities in financial statements has been the focus of accounting research, and also the major problems deserving governments to solve. In recent years, the management level of enterprises in China falsifies financial statements by all methods to conceal the real financial conditions, business operations, and cash flows, with different aims. As a result, it causes great losses to the state. Besides, information users can not make the right decision with these falsified financial statements, causing a serious credit mess in market. This paper analyzes the motives of enterprises in China for falsifying financial statements, and also the common methods, advancing relevant methods for auditing recognition.

Modeling the Cash Flow Dynamics of Private Equity Funds: Theory and Empirical Evidence

This article presents a novel continuous-time approach to modeling the typical cash flow dynamics of private equity funds. The model consists of two independent components. First is a mean-reverting square-root process applied to model the rate at which capital is drawn over time. Second is the stream of capital distributions, which is assumed to follow an arithmetic Brownian motion with a time-dependent drift component that incorporates the typical time-pattern of the repayments of private equity funds. The empirical analysis shows that the model can easily be calibrated to real-world fund data by the method of conditional least squares and nicely fits historical data. The authors use a data set of mature European private equity funds provided by Thomson Venture Economics. Their model explains up to 99.6% of the variation in average cumulated net fund cash flows and provides a good approximation of the empirical distribution of private equity fund cash flows over a typical fund’s lifetime. Overall, the empirical results indicate that the model is of economic relevance in an effort to accurately model the cash flow dynamics of private equity funds.

Smart money meets smart size

We examine the smart money effect from two dimensions – fund size and cash flow based on the US open-end equity funds. We find that positive cash flow portfolios earn significant four-factor alphas, and that there exists a quadratic relationship between positive cash flow fund size and abnormal returns. This is a departure from the pure small fund effect documented in the literature. Putting size and cash flows together, we are able to show that conditional on size, funds with higher cash inflows outperform funds with lower cash inflows, and that conditional on cash flows, smaller funds generally outperform larger funds. We conclude that following the money flows into mutual funds can bring higher risk-adjusted returns, especially when the money flows meet the optimal fund size.

Net Asset Value Discounts in Listed Private Equity Funds

This paper investigates determinants and consequences of net asset value discounts in listed private equity funds. Listed private equity funds share characteristics of closed-end mutual funds and traditional unlisted private equity funds and can therefore offer insights into both. Our results have particular relevance to the pricing of unlisted private equity funds where no market prices are observable. We find that funds start at an initial premium of -2.5 % and adapt to the long-term average of -21 % after two years. Fund returns display a U-shaped seasonality, which is related to publishing dates of annual reports. Stock performance is exceptionally weak in buyout funds after their initial public offering. Premia predict future stock returns and are explained by liquidity and by investor sentiment, but not by the fund's investment degree. A decrease in premia over the first few quarters after the fund's IPO remains unexplained, which partially supports the management ability hypothesis. Private equity fund premia depend on credit markets and systematic risk. This relation suggests that some information about the fund's portfolio is not reflected in net asset values, which seem to proxy for future fund cash flows.

Far tail or extreme day returns, mutual fund cash flows and investment behaviour

This study examines the frequency of extreme trading days and investment behaviour in Sweden. We show that the frequency, as well as the magnitude of extreme trading days has increased over time. We also show that the frequency of extreme trading days in a year is positively correlated to the frequency the preceding year and that this behaviour has persisted from 1940 to 2006. Furthermore, we show that aggregate cash flows into equity and bond funds are unrelated to risk measured by SD of return. Our findings show that investors, individuals as well as corporations, use simple passive investment strategies and hence do not believe in market timing or wish to risk capital on capturing far tail or black swan-type returns.

A genetic algorithm estimation of the term structure of interest rates

The term structure of interest rates is a key instrument for financial research. It provides relevant information for pricing deterministic financial cash flows, it measures economic market expectations and it is extremely useful when assessing the effectiveness of monetary policy decisions. However, it is not directly observable and needs to be estimated by smoothing asset pricing data through statistical techniques. The most popular techniques adjust parsimonious functional forms based on bond yields to maturity. Unfortunately, these functions, which need to be optimised, are highly non-linear which make them very sensitive to the initial conditions. In this context, this paper proposes the use of genetic algorithms to find the values for the initial conditions and to reduce the risk of false convergence, showing that stable parameters are obtained without imposing arbitrary restrictions.

Advertising and mutual fund asset flows

PurposeThe paper aims to examine the effect of advertising on mutual fund cash flows in the Finnish fund market.Design/methodology/approachThe paper's unique data set allows the observation of the effects of monetary advertising spending and the choice of advertising media.FindingsThe paper finds that neither past year's performance nor advertising alone is sufficient to produce increased cash flows. However, advertising together with past performance is found to significantly affect cash flows. The positive effect of advertising is limited to the use of non‐perishable advertising media. Additionally, it is found that fund families spending proportionately more on advertising receive higher asset flows.Originality/valueThe data are unique in that they can identify fund families that advertise, and also how much they spent on advertising in a given year and the dollar amount spent on five different media types. Obviously, having also fund level data available would enable more thorough analysis.

Performance, Expenses and Cash Flows: Evidence from Greek Equity Funds

This paper seeks to exploit the factors that affect performance, expense ratio and cash flows of Greek equity mutual funds in the time period 2002-05. In the first step, we apply the well-known Jensen's model and we find that the funds of the sample do not present significant and consistent superior risk-adjusted performance in relevance to the average market portfolio, even though we record slight statistical evidence for the opposite. Consequently, we demonstrate that the performance is contrarily related to the expense ratio. Further, we provide denotations that the expense ratio is affected negatively by the length of fund's assets and risk-adjusted return, while expense ratio is amplified by the increase of the risk, the purchase and the redeeming charges. Finally, we indicate that the flows towards funds are reduced due to accretions in expenses, while flows are positively influenced by the age of funds, the return and the magnitude of family's assets.

Genetic Algorithm Estimation of Interest Rate Term Structure

The term structure of interest rates is an instrument that gives us the necessary information for valuing deterministic financial cash flows, measuring the economic market expectations and testing the effectiveness of monetary policy decisions. However, it is not directly observable and needs to be measured by smoothing data obtained from asset prices through statistical techniques. Adjusting parsimonious functional forms - as proposed by Nelson and Siegel (1987) and Svensson (1994) - is the most popular technique. This method is based on bond yields to maturity and the high degree of non linearity of the functions to be optimised make it very sensitive to the initial values employed. In this context, this paper proposes the use of genetic algorithms to find these values and reduce the risk of false convergence, showing that stable time series parameters are obtained without the need to impose any kind of restrictions.

Construction of Consistent Forecasted Financial Statements (ConstruccióN De Estados Financieros Proyectados Y Consistentes)

In order to value a firm or a project, it is necessary to construct estimated financial statements and free cash flows. In this teaching note we will present a spreadsheet model - EXCEL© - for forecasting financial statements in a consistent way and without using what is known as plugs. The simplest and coarse form of a plug in forecasting financial statements is to match the financial statements (in particular the Balance Sheet) creating a line or item to account for any difference that arises between total assets and liabilities plus debt in order to make the Balance Sheet to check. If total assets are greater than total liabilities plus equity, then the plug is a new line in the liabilities side. If lower, the plug is a line in the assets side. This is no only inappropriate, but it can hide mistakes when working with complex models such as those used by valuation analysts. We illustrate the procedure with an example that has some complexities. These complexities are explained in Section One. The purpose of this note is that the reader, following the instructions, could complete the example. Then, the readers are encouraged to read actively by constructing the financial statements for themselves on a spreadsheet. The relevant financial statements are: the Balance Sheet (BS), the Income statement (IS) and the Cash Budget (CB). The construction of the financial statements starts from policies and/or targets (i.e. accounts receivable policy or target) and input data that is specific for the firm or from the macroeconomic environment. With these targets or policies and data we can construct the financial statements. For valuation purposes, the balance sheet and the income statements are important but may be insufficient if we wish to construct the cash flow using the direct method. For that reason we construct the CB. From the table of parameters we construct tables that will be used in the construction of the main financial statements. In the main text we describe some complexities such as price-demand elasticity, the effect of book value leverage on the real growth and on accounts payable policy. We introduce the effect of accounts receivable policy on growth as well. We reproduce Excel© spreadsheet and in the last two columns we include the formulation than the reader should replicate and copy for the forecasting period. There are a few exceptions, but they will be announced.

Monetary Policy, Corporate Financial Composition and Real Activity

This article addresses two fundamental questions about monetary policy, credit conditions and corporate activity. First, can we relate differences in the composition of debt between tight and loose periods of monetary policy to firm characteristics like size, age, indebtedness or risk? Second, do differences in companies' financial compositions matter for real activity of firms such as inventory and employment growth? The article offers some evidence from firms in the UK manufacturing sector which suggests that the composition of debt differs considerably with characteristics such as size, age, debt and risk, it also shows a significant effect from financial composition and cash flow to inventory and employment growth. (JEL codes: E32, E44, E51) Copyright 2006, Oxford University Press.

The Expansion of a Pineapple Plantation in Ghana

Agriculture plays a greater role in the affairs of any state or economy. It is one of the key economic sectors of a nation of which contributions made to a nation's well-being are of great importance. Agriculture, as it is well known, is basically of utmost importance to developing nations wherein the masses or the bulk of the population, particularly those in the rural areas, make ends meet by either engaging in subsistence or commercial agricultural activities. The Ghanaian government adoption of a private sector export-led growth strategy that encompasses the development and promotion of non-traditional export commodities, envisaged a surge in production, marketing and sale of many of the nation's non-traditional produce, notably pineapples, mangoes, bananas, to name but a few. This increase in production, marketing and sale of non-traditional commodities is contributing a large share to revenues from agriculture and making the sector to account for almost half of the country's gross domestic product and export earnings. In addition, it partly helps solve the unemployment problem that was once an endemic phenomenon in rural areas. This study examines the feasibility of the expansion drive by the Princess Cold Stores Limited of its pineapple plantation to include the possibility of exporting a substantial percentage of the produce to the European market. An assessment on the project viability is taken from the perspectives of different stakeholders and the results show that the incremental benefits to derive from undertaking the project exceeds its related incremental costs. This excess benefit, therefore, translates the project feasibility to its respective stakeholders and as such was found viable and also having the capacity to contribute immensely to the financial net cash flow and economic benefit of the project and to the economy at large.

Incentive Fees and Mutual Fund Volatility Timing

This paper shows that compensation incentives partly drive fund managers' market volatility timing strategies. Larger management fees are associated with less counter-cyclical or more pro-cyclical volatility timing. Fund investment objectives and styles also partly determine volatility timing. Funds with more aggressive styles time volatility more counter-cyclically. Thus, managers may try to outperform the general market by adopting aggressive styles, while dynamically hedging portfolio volatility using counter-cyclical volatility timing. We also find that fund managers systematically change their portfolio betas in response to aggregate equity fund cash flows. The average effects of volatility timing and fund flow timing on fund performance are mostly positive for funds that increase their betas when conditional volatility and fund flows increase (i.e., pro-cyclical timers).

Empirical Evidence on the Relationship Between For-Profit Universities Financial Information and Future Cash Flows - Are For-Profit Universities Good Candidates for Investors or Students?

This study examines the relationship between for-profit universities financial signals and future cash flows. The study provides evidence as follows: (1) for-profit universities financial information can be categorized into four factors; information, stability, efficiency and reputation. (2) there is a positive association between price and future cash flows and a negative association between administrative costs and future cash flows. (3) financial vulnerability measures provide incremental information content beyond efficiency measures. The efficiency signal administrative costs is negatively and significantly related to future cash flows even after adding vulnerability measures to the equation. This indicates that vulnerability measures are not surrogates for the efficiency measure.

Treasurer's guide to share-based payment accounting

Treasurers, take note:The recent IASB standard and the revision of FASB Statement No. 123 will both significantly impact the way companies account for share-based payment in the future. The authors examine both standards to help corporate treasurers fully understand the effect on companies' financial statements and future cash flows. The authors also provide a handy list of proactive steps that treasurers can take now. © 2005 Wiley Periodicals, Inc.

The ABCs of Mutual Funds: A Natural Experiment on Fund Flows and Performance

In the 1990s, a large majority of funds with front-end loads introduced additional share classes, which allowed investors to pay annual fees and/or back-end charges instead of a front-end load. The transition to a multiple-class structure provides a natural experiment with regard to investor clienteles and fund performance. We examine (a) whether the new fee structures increase fund cash flows by attracting investors with different investment horizons and sensitivities to performance; (b) whether changes in the volatility and level of fund flows induced by new investor clienteles affect fund performance - despite little change in fund management and investment objectives. Our finding is that the multiple-class funds, after controlling for performance and fund attributes, attract significantly more new money than the single-class funds. Consistent with the clientele hypothesis, investors in the new classes tend to have a shorter investment horizon and a greater sensitivity to fund performance than investors in the front-end load class. The downside to introducing the new classes, however, is a significant drop in fund performance, which erodes the cash flow benefit of the new classes. Furthermore, the performance drop is shown to be increasing in the relative size of the new classes and in the volatility of their fund flows.

Information Provided by Accrual and Cash Flow Measures in Determining Firms’ Performance: Malaysian Evidence

Accrual and cash flow measures have been argued to be able to evaluate firms’ performance, although the results are inconclusive throughout countries and time. This study examined the accrual and cash flow measures independently and jointly among Malaysian firms. The study predicted that the low cash flow subgroups (high income to cash flow firms) would show better results in operating, investing and financing activities. Our descriptive analysis of the structural components of the firms seemed to confirm that low cash firms relatively had higher sales, total assets and shareholders’ equity than the high cash firms, indicating that these firms showed better operating performance than other subgroups. With regard to the investing and financing activities, small firm group confirmed the expectations but big firms exhibit different results. Further analysis on the correlation among variables yielded evidence to suggest that there is a significant relationship between non-current assets and debt with investing and financing cash flows, in the expected direction of movement. Using income and cash flow measures, independently and jointly, the results show that none of the measures can be used to evaluate Malaysian firms’ performance. The findings appear to be not supportive of previous research which argued that income and cash flow measures have incremental and joint information in assessing firms’ performance.

Factoring: the perceived role in cash management for New Zealand SMEs

This study presents an investigation into stakeholder understanding and perceptions of factoring as a cash management tool for small and medium sized enterprises (SMEs). A literature review confirmed that factoring can benefit SMEs cash-flow and debtor management, but also identified that its under-utilisation or improper use may stem from misunderstandings and perceptual blocks held by stakeholders making cash management decisions (i.e. SME owner/operators, business advisors and factoring companies). Therefore, research was undertaken which: investigated factoring utilisation analysed patterns and themes with respect to perceptions in the marketplace developed a model of factoring perception. The study confirmed that there was a general agreement in the marketplace that factoring is under-utilised, poorly understood and suffers from a poor image. From the findings, a factoring maximisation model was developed, demonstrating how perceptions should be changed in order to maximise factoring's effectiveness in the New Zealand marketplace. These findings are useful in guiding factoring companies engaged in promoting factoring in the marketplace. It also highlights the deficiencies in SME owner/operators' and business advisors' understanding of factoring which is limiting their ability to optimise their cash-flow financing decisions.